Here’s What Really Happens to Your Credit When You Seek Debt Counseling

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If you’re struggling with debt, it can be hard to determine the best method for getting rid of it. Snowball? Avalanche? Consolidation? Should you freeze your credit card in a block of ice, or cut it up and toss it in the trash?

If questions about paying off debt have your head swimming, it might be worth your time to speak with a debt counselor. Also referred to as credit counselors, these are trained individuals who can review your financial situation and make recommendations to improve it. They might help you organize your credit accounts, obtain a credit report or develop a budget.

Depending on your situation, a debt counselor may even help you set up a plan to pay off your debt. More on that later — for now, let’s focus on what a debt counselor does and whether you could benefit from working with one.

When Should I Work With a Debt Counselor?

If you’re afraid you can’t make your debt payments each month, or you feel like you’ll never get out of debt no matter how hard you try, it can be helpful to speak with a debt counselor. As an impartial third party, a qualified counselor can provide advice and tips based on your specific situation.

How Can I Find a Debt Counselor?

To find a reputable debt counselor, check out the Financial Counseling Organization of America or the National Foundation for Credit Counseling. Each maintains a directory of member organizations — most of them nonprofits — that serve a variety of needs.   

A legitimate organization will be happy to provide information about its services for free, without requiring you to disclose your financial situation.

The Consumer Financial Protection Bureau (CFPB) recommends that you ask potential debt counselors these questions:

  • What services do you offer?
  • How is credit counseling offered?
  • Do you offer free educational materials?
  • What are your fees?
  • What if I can’t afford to pay the fees?
  • Will I have a formal written agreement with you?
  • What are the counselors’ qualifications?
  • How are your employees paid?

As always, be sure to get everything in writing and read the fine print before signing up for any service. The CFPB recommends avoiding organizations that pressure you into a debt management plan before fully considering your financial situation.

What Can I Expect When I Meet a Debt Counselor?

Your first meeting with a debt counselor, whether in person or on the phone, should last about an hour. After the call, the counselor will typically provide a written report with the details of your situation and recommendations. This report won’t be packed with surprises. It will review what you discussed and the next steps, which you likely discussed as well.

Even if a debt management plan isn’t right for you, a debt counselor may still be able to provide services to improve your finances. A debt counselor can review your credit report and help you dispute errors. They can also guide you toward free educational resources to boost your financial know-how.

What’s a Debt Management Plan?

A woman uses a calculator, a notepad and her laptop to work on her finances.
Aileen Perilla/The Penny Hoarder

A debt management plan rolls all your debts into one monthly payment to make it easier to manage. If you choose to use one, your debt counselor’s organization will set up the plan and work with your creditors to make sure everyone gets paid on time.

Debt management plans usually don’t reduce your debt, but they may reduce your interest rates by as much as half or extend your payment timeline to make paying your debt more manageable.

You can expect a setup fee of no more than $50 to participate in a debt management program and pay your debt through your debt counselor’s organization. Monthly fees are normal for debt management plans, but they also shouldn’t be more than $50.

Don’t plan to keep racking up debt, though — your lines of credit will be closed or suspended while you’re in a debt repayment plan.

Initiating a debt management plan could cause a dip in your credit score, because it indicates you’re struggling with your finances. But as you build a payment history through the plan, your score will likely improve.  

What Other Options Do I Have?

You don’t have to be seeking a debt management program or headed toward bankruptcy (debt counseling is required before filing Chapter 7 or Chapter 13 bankruptcy) to work with a debt counselor.

But if you’re not sure whether you’re ready to talk to someone about your credit or debt concerns, you can take steps to try to improve your financial situation on your own. You may be able to consolidate your debt or negotiate your credit interest rates. Or you may simply need a nudge to choose a debt payoff method — snowball versus avalanche, anyone? — and stick to the plan while you make steady progress.

Lisa Rowan is a senior writer at The Penny Hoarder.

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