How Does Debt Counseling Work?

How Does Debt Counseling Work? article image.

Credit is one of the most powerful tools in your financial toolkit, but it's important to manage it effectively. Maybe you've accumulated debt because you've had a string of unexpected expenses or you lost your job. Or maybe you're still carrying a load of debt from student loans or a past medical crisis. If your debts are large and growing, and you're unable to pay them down, you may want to consider debt counseling.

Debt counseling gives you the financial education, tools and insights you need to get a handle on your finances. Debt counseling can bring relief, but it's not a quick fix. Your debts won't instantly disappear, nor will any credit issues you may have developed along the way. Instead, the process can help you find new ways to approach your challenges so that the hard work you do to manage and pay down debt is more likely to be successful.

What Is Debt Counseling?

Debt counseling, also called credit counseling, involves working with a professional who helps you assess your financial situation and work out practical solutions for improving your financial health, including paying down or paying off debt. Among the items a debt counselor can help you with:

  • Objective feedback on your finances—income, expenses and debt.
  • Actionable suggestions for making things better, for example by finding ways to bring in more income or reorganize your expenses.
  • A better understanding of your debt, including your rights and responsibilities as a borrower.
  • Devising a strategy to tackle your debts and improve your financial health.
  • Establishing a debt management plan that keeps you on track month by month.

Here's how debt counseling works: If you decide to work with a debt counseling agency, you'll sign an agreement and provide information on your finances. A credit counselor will contact you—often by phone—to talk about your concerns and objectives and discuss ideas for addressing your finances. As part of this service, your counselor may create an action plan for you.

You may also decide to work with your counselor to establish a debt management plan. This is an ongoing agreement that typically includes a small upfront fee and an ongoing monthly fee. With this arrangement, you make one monthly payment to the debt counseling service; they, in turn, make monthly payments to your creditors. By communicating with your creditors and taking your whole financial picture into account, debt counselors may be able to help you devise a plan to pay off your debts in three to five years.

Debt counseling is not the same thing as debt settlement. Debt settlement companies attempt to negotiate reduced payments with your lenders, generally in exchange for a fee. In a debt settlement arrangement, you may indeed pay less than the full amount of your debt. The hitch is that you'll typically be asked to stop making payments on your debt, which will cause late payments to appear on your credit report and seriously damage your credit. If the settlement process is successful, the account will appear as "settled for less than originally agreed" on your credit report, which can also result in credit score harm. Late payments and settled accounts stay on your report and affect your credit score for up to seven years. It's best to avoid debt settlement in all cases unless bankruptcy is your only other option.

How Can Debt and Credit Counseling Impact Your Credit?

A debt management plan you create through credit counseling may help you avoid credit score harm. Your counselor may be able to help you negotiate a lower interest rate or lower minimum monthly payments that make it easier for you to repay your debts—but without settling your debt for less than its original value. In this way, you may be able to save your credit score and report from a negative hit.

Ideally, debt counseling should improve your ability to repay your debts on time and manage your credit successfully. Timely payments every month help raise your credit score over time. Assistance with budgeting may enable you to use credit more effectively and stay away from unmanageable debt in the future. As for the counseling itself, it has no direct effect on your credit score.

Is Debt Counseling a Good Idea?

If you're feeling overwhelmed, debt counseling may indeed be a good option for you. Being stuck in a cycle of debt isn't just tiring; it can also be confusing, isolating and even paralyzing. Working with a professional credit counselor can help you overcome these obstacles.

That said, debt counseling doesn't work equally well for everyone. Credit counseling can be a catalyst for change, but only if you're prepared to do the work of creating and maintaining a plan. While initial consultations with a credit counselor are free, you'll pay a small ongoing fee above and beyond your monthly debt payments if you opt for a debt management plan. Before starting debt counseling, be ready to learn and make changes. A good credit counseling service can give you tools, but only you can use those tools to create a better financial position.

How to Find a Debt Counselor

There are for-profit and nonprofit debt counseling services. Working with a reputable nonprofit service is the best way to go. In particular, be wary of for-profit "credit repair" companies that promise to fix your credit or erase negative information in exchange for payment. These companies are often scams, and won't do anything for you that you can't do yourself for free. Under the Credit Repair Organizations Act, companies offering credit repair services may not demand advance payment and must provide written contracts for their services. As a consumer, you have the right to cancel. If you have a problem with any credit repair company, file a report with your local consumer affairs office or your state's attorney general.

For help finding a nonprofit debt or credit counseling agency, check out the National Foundation for Credit Counseling and the Financial Counseling Association of America. Either can help point you in the direction of a certified credit counselor. The U.S. Department of Justice also maintains a list of approved credit counseling agencies by state.

Keeping Wise Counsel

Credit is a powerful financial tool, one that's worth keeping sharp over time. Working with a debt counseling agency can help you better understand your finances—and the choices you have for improving your financial health. As you work on paying off your debts and improving your credit, you can access your Experian credit report and score to track your progress, or consider free credit monitoring to help you stay on top of changes as they occur.

How Good Is Your Credit Score?

300 credit score301 credit score302 credit score303 credit score304 credit score305 credit score306 credit score307 credit score308 credit score309 credit score310 credit score311 credit score312 credit score313 credit score314 credit score315 credit score316 credit score317 credit score318 credit score319 credit score320 credit score321 credit score322 credit score323 credit score324 credit score325 credit score326 credit score327 credit score328 credit score329 credit score330 credit score331 credit score332 credit score333 credit score334 credit score335 credit score336 credit score337 credit score338 credit score339 credit score340 credit score341 credit score342 credit score343 credit score344 credit score345 credit score346 credit score347 credit score348 credit score349 credit score350 credit score351 credit score352 credit score353 credit score354 credit score355 credit score356 credit score357 credit score358 credit score359 credit score360 credit score361 credit score362 credit score363 credit score364 credit score365 credit score366 credit score367 credit score368 credit score369 credit score370 credit score371 credit score372 credit score373 credit score374 credit score375 credit score376 credit score377 credit score378 credit score379 credit score380 credit score381 credit score382 credit score383 credit score384 credit score385 credit score386 credit score387 credit score388 credit score389 credit score390 credit score391 credit score392 credit score393 credit score394 credit score395 credit score396 credit score397 credit score398 credit score399 credit score400 credit score401 credit score402 credit score403 credit score404 credit score405 credit score406 credit score407 credit score408 credit score409 credit score410 credit score411 credit score412 credit score413 credit score414 credit score415 credit score416 credit score417 credit score418 credit score419 credit score420 credit score421 credit score422 credit score423 credit score424 credit score425 credit score426 credit score427 credit score428 credit score429 credit score430 credit score431 credit score432 credit score433 credit score434 credit score435 credit score436 credit score437 credit score438 credit score439 credit score440 credit score441 credit score442 credit score443 credit score444 credit score445 credit score446 credit score447 credit score448 credit score449 credit score450 credit score451 credit score452 credit score453 credit score454 credit score455 credit score456 credit score457 credit score458 credit score459 credit score460 credit score461 credit score462 credit score463 credit score464 credit score465 credit score466 credit score467 credit score468 credit score469 credit score470 credit score471 credit score472 credit score473 credit score474 credit score475 credit score476 credit score477 credit score478 credit score479 credit score480 credit score481 credit score482 credit score483 credit score484 credit score485 credit score486 credit score487 credit score488 credit score489 credit score490 credit score491 credit score492 credit score493 credit score494 credit score495 credit score496 credit score497 credit score498 credit score499 credit score500 credit score501 credit score502 credit score503 credit score504 credit score505 credit score506 credit score507 credit score508 credit score509 credit score510 credit score511 credit score512 credit score513 credit score514 credit score515 credit score516 credit score517 credit score518 credit score519 credit score520 credit score521 credit score522 credit score523 credit score524 credit score525 credit score526 credit score527 credit score528 credit score529 credit score530 credit score531 credit score532 credit score533 credit score534 credit score535 credit score536 credit score537 credit score538 credit score539 credit score540 credit score541 credit score542 credit score543 credit score544 credit score545 credit score546 credit score547 credit score548 credit score549 credit score550 credit score551 credit score552 credit score553 credit score554 credit score555 credit score556 credit score557 credit score558 credit score559 credit score560 credit score561 credit score562 credit score563 credit score564 credit score565 credit score566 credit score567 credit score568 credit score569 credit score570 credit score571 credit score572 credit score573 credit score574 credit score575 credit score576 credit score577 credit score578 credit score579 credit score

The purpose of this question submission tool is to provide general education on credit reporting. The Ask Experian team cannot respond to each question individually. However, if your question is of interest to a wide audience of consumers, the Experian team may include it in a future post and may also share responses in its social media outreach. If you have a question, others likely have the same question, too. By sharing your questions and our answers, we can help others as well.

Personal credit report disputes cannot be submitted through Ask Experian. To dispute information in your personal credit report, simply follow the instructions provided with it. Your personal credit report includes appropriate contact information including a website address, toll-free telephone number and mailing address.

To submit a dispute online visit Experian's Dispute Center. If you have a current copy of your personal credit report, simply enter the report number where indicated, and follow the instructions provided. If you do not have a current personal report, Experian will provide a free copy when you submit the information requested. Additionally, you may obtain a free copy of your report once a week through April 2022 at AnnualCreditReport.