Could a Credit Counselor Help You Get Out of Debt?

Photo illustration to accompany an article on credit counseling and whether it can help you get out of debt Grant Crowder and Getty Images

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Free, one-on-one financial advice — with no obligations and “no pitfalls,” according to one expert. 

It’s not too good to be true. In light of the COVID-19 pandemic, personal finance pros say credit counseling services can be a risk-free lifeline for all types of people. And many of the organizations who offer it are stepping up their outreach efforts. 

“There are no pitfalls to receiving the financial advice provided during credit counseling,” says Jim Triggs, CEO of Money Management International, a nonprofit financial guidance firm. Use of this voluntary counseling service is between you and the credit counseling firm, Triggs says, and won’t result in information being passed on to the credit bureaus without your consent.

Credit counseling is free or low cost, and it’s commonly offered through nonprofits. Consolidated Credit, for example, recently announced the launch of its Shutdown Hotline, a free phone service that offers debt analysis and referral to COVID-19–specific resources. And the National Foundation for Credit Counseling (NFCC) is also offering free credit counseling services devoted to assisting people in light of the pandemic. The group is focused on helping people get “a little bit of breathing room” for near-term relief, spokesman Bruce McClary told CNBC Select recently. 

If you’re curious about credit counseling, we’ll explain how to choose a qualified credit counseling agency and what to expect from the process. We’ll also provide valuable tips from industry experts on how to get the most out of credit counseling services.

Credit Counseling: What It Is and What It Can Help With

First and foremost, credit counseling takes an education-based approach to debt management. This is in stark contrast to services like debt settlement, in which for-profit companies try to settle debts on your behalf in exchange for hefty fees. The ultimate goal is to empower people to take control of their own financial health and, more importantly, make better decisions in the future.

“We’re lacking the knowledge and education we all need to manage our finances and feel good about doing it,” says Anthony Carlton, independent financial adviser at LearnLux, a company that creates online financial literacy tools and information. “Money is the number one source of stress for Americans, and there needs to be a major shift in how we teach people about practical money management.” For Carlton, the solution is clear: more widespread access to financial counseling.

A common misconception is that you need to be in a certain amount of debt to benefit from credit counseling. This couldn’t be further from the truth. “Everyone has the ability to benefit from a credit counseling session with a certified credit counselor,” says Chase Peckham, director of community outreach at the San Diego Financial Literacy Center and the host of the personal finance podcast “Talk Wealth To Me.” “A certified credit counselor will go over your budget with you to discover areas where your spending may be more than you realized, discuss some savings tips, as well as suggestions on how to pay off debt if it applies.”

Whether you need a debt management plan or simply want advice on how to better manage your finances, there’s always something to be gained from credit counseling. But those who have large amounts of high-interest debt or are several months behind on payments have the most to gain from this service.

According to the Federal Reserve Bank of New York, 4.7% of all consumer debt balances were at least 30 days late at the end of 2019; of these balances, nearly two thirds were over 90 days late. The study found nearly 9% of credit card debt balances were delinquent by a minimum of 90 days.

It’s no surprise, then, that the majority of people who seek credit counseling are struggling with credit card debt, according to Peckham. For those with large amounts of credit card debt, credit counseling can offer a range of solutions from expert advice to debt management plans.

How to Hire the Right Credit Counselor for You

When it comes to choosing a credit counseling agency, accreditation is key. For Anthony Carlton, two names come to mind: the National Foundation for Credit Counseling and the Financial Counseling Association of America. “These two nonprofits are also the two largest independent certifiers of credit counselors, so look for the initials NFCC and FCAA when searching for a reputable credit counselor,” Carlton advises.

It’s also important to note that some credit counseling agencies specialize in specific types of debt. “For example, at DebtWave, we specialize in helping consumers pay off credit card debt,” says Chase Peckham. “For those consumers who also have student loan debt or car payments they are struggling with, our team can provide resources and guidance, but we can’t help them beyond pointing them in the right direction.” Keeping this in mind, take a look at which types of debt you struggle with the most and try to find a credit counseling agency with specific expertise in those areas.

Pro Tip

The relationship is a two-way street. You’ll only get out of credit counseling what you put into it, and that means being up front and honest with your counselor.

What Are My Other Options?

While credit counseling is a logical first step for many debt repayment options, there are alternatives that can be pursued alongside financial counseling. One option is debt settlement, a service offered by (usually for-profit) companies in which they attempt to settle your debts for a lower amount in exchange for a fee. However, nothing is guaranteed from the debt-settlement process, which often takes years to complete and can severely impact your finances and credit.

Debt consolidation loans are another option. This could be a good fit if you have multiple high-interest loans with significant monthly interest payments that prevent you from making progress on paying down the principal. These loans involve taking out a single low-interest loan to pay off and close your existing high-interest loans. As with any type of loan, those with better credit scores will get more favorable interest rates; those with lower credit scores may be required to secure the loan with collateral, which creates additional risk.

Finally, filing for bankruptcy is sometimes the best way out for some people with particularly high debt-to-income ratios. Keep in mind that credit counseling is a prerequisite to file for bankruptcy. The U.S. Department of Justice maintains a list of nonprofit credit counseling agencies that are approved for pre-bankruptcy counseling.

If you choose to enter a debt-management plan with a credit counseling agency, make sure that’s not the only thing you get out of the relationship. A good credit counseling service will provide ongoing support and education throughout the duration of your DMP to help you learn to better manage your finances in the future. If the agency can’t commit to this level of support, it’s time to shop around for other credit counselors.

“Credit counseling can bring clarity and direction when experiencing financial challenges, but we are limited when our clients don’t disclose important details, or when they wait too long to contact us,” says Jim Triggs. “It requires a willingness to become more organized and to work hard toward your goal.”