What is Credit Counseling?

Are your bills piling up fast and never seem to stop? Wondering if guidance from a certified credit counselor could help you get your debt under control?

You may have seen ads for credit counseling companies. But beware – many of these could be credit counseling scams trying to capitalize on your vulnerability. Instead, you want to work with a legitimate credit counseling organization that is serious about helping you, and we can show you how to do that.

So what is credit counseling and how could it change your finances for the better? We’ll discuss all that and more in our guide below. 

How does credit counseling work?

Credit counseling companies are typically non-profit organizations that assist individuals in financial distress. They offer financial education, budgeting advice, and advice on how to get out of debt. 

These companies employ counselors that take an in-depth look into your finances and help you strategize the best ways to move forward. They’ll work with you to create an individualized plan using expert advice, tools, and resources – also known as a debt management plan.

What is a debt management plan?

A debt management plan is set up by your credit counselor on your behalf to help you pay off your unsecured debt, like credit card debt or personal loans, with reduced interest rates. 

Your counselor will contact your creditors on your behalf to notify them of your debt management plan. They will work to negotiate better terms on your debt – such as lower interest rates or waived late fees. You’ll make payments directly to your counselor each month and they will continue to monitor your progress. 

Oftentimes, you’ll be charged a small enrollment fee for the debt management plan. However, many people find it to be worthwhile considering the benefits they receive. 

If your non-mortgage debt-to-income ratio is above 15%, a debt management plan could be a good choice.

What should you expect from a credit counseling session?

You should only work with a credit counseling company that’s a non-profit organization and also accredited by the National Foundation for Credit Counseling (NFCC). Otherwise, you risk falling prey to a scam.

Most credit counseling companies offer initial consultations that are free. Afterwards, they may charge for certain services like debt consultations and enrollment fees for a debt management plan, but these rates typically aim to be in the affordable range.

Does credit counseling hurt your credit?

Your initial meeting with a credit counselor won’t show up on your credit report and won’t hurt your score. Credit counseling is designed to improve your credit score over time, however, in the short-term, some steps might create a slight dip. 

For instance, your credit counselor might have to pull your credit report. They might also require you to close an account before starting a debt management plan. Both these actions could put a small dent on your score, but this is temporary and you should start to see improvements over time. 

How much does credit counseling cost?

Most credit counseling companies are non-profit organizations that do charge certain fees or monthly costs in order to cover their costs. That said, they shouldn’t charge you more than $100 for a session. 

You should be wary of any companies that are trying to charge you hundreds of dollars for their services or promise to improve your score by a large amount very quickly. You also want to stay away from companies that will push you to pay them before you receive information about how they can actually help you. 

Is credit counseling right for me? 

The ideal candidate for credit counseling will have over 15% of their debt-to-income ratio lie in unsecured debt – such as credit card debt or personal loans. Unfortunately, credit counseling companies can’t help you with mortgage payments, auto loans, student loans, or any other type of secured loan. 

If you’re struggling with making payments on your mortgage, auto loan, or another kind of secured debt, a credit builder membership may be a better alternative for you – and cheaper. 

Does credit counseling work?

Credit counseling does work so long as you follow the steps laid out for you by your certified credit counselor. It will take hard work, consistency and you shouldn’t expect results to show up overnight. However, over time you should start to see improvements. 

In the meantime, it’s important to look for alternative ways to boost your cash flow and save money, pay off debt, and educate yourself about financial health. MoneyLion’s ongoing resource platform and intelligent budgeting tools are a great place to start. 

Steer clear of credit counseling scams 

Good credit counselors will take a hard look at your full financial situation before making recommendations. If someone is recommending a paid service, like debt management, before taking the time to understand your finances, it’s a potential red flag. 

You also want to be wary of someone promising to improve your score easily and quickly. Improving your credit score is hard work and takes time. Authentic credit counselors that want to help you will never sugarcoat this.

More ways to improve your credit score 

You may or may not qualify for credit counseling services, either way, a legitimate alternative is a Credit Builder Plus membership. A Credit Builder Plus membership can help you improve your credit score with a small, low-cost loan that’s designed to be easy to pay off. By making regular and consistent payments, your score will get a boost. 

MoneyLion’s Credit Builder Plus membership has helped more than half our members raised their score by up to 27 points within 60 days. It’s a safe, affordable alternative to credit counseling companies. 

MoneyLion’s Credit Builder Plus membership also features expert financial advice from the Financial Heart tool, Instacash advances, credit monitoring tools, and even fully managed investment portfolios.

Get started on improving your financial health today!