Debt

Is Debt Counseling a Good Idea?

Paying down debt isn't always easy—especially if a financial emergency has catapulted you into debt, or you're up against excessive interest rates or late payment fees. Debt counseling, also known as credit counseling, may be worth exploring if you're feeling overwhelmed. The process involves partnering with a certified credit counselor to better understand your options for paying down your debts and ultimately strengthening your overall financial health.

Part of their job is to evaluate the reality of your financial situation and offer personalized guidance regarding budgeting, credit and more. The objective is to identify trouble areas, make an action plan for fixing them, and take steps to prevent them from happening again in the future. Debt counseling typically begins with a free initial consultation where the counselor will assess your situation and suggest the best path forward for your unique needs.

When Does Debt Counseling Make Sense?

Working with a debt counselor begins with signing a service agreement and bringing them up to speed on your financial situation. Being as upfront and honest as possible here can only help you—debt counseling is less about dwelling on your past mistakes and more about finding positive solutions you can feel good about. Once your counselor reviews your information, you can expect an initial meeting to begin mapping out a plan.

The potential benefits of debt counseling include the following:

  • It can help rebuild your credit. Being over your head in debt can put your credit at risk, especially if you've fallen behind on payments. (Your payment history makes up 35% of your FICO® Score .) The amount of debt you have as it relates to your available credit—your credit utilization—accounts for another 30% of your score. If you're struggling to find room in your budget to make your minimum payments, working with a debt counselor could help get you on the right track.
  • It can reduce debt-related costs. Depending on your situation, your credit counselor may suggest enrolling in a debt management plan. This involves them negotiating new payment plans directly with your creditors. You'll then make one monthly payment to the counseling agency, and they'll pay your creditors on your behalf. The service will likely come with a monthly fee, but it could be worthwhile if you're able to lock in lower interest rates or waive certain creditor fees. Bringing down these debt-related costs can help you get out of debt faster because a larger percentage of your payments will go toward your principal balances. It can also help simplify and streamline your debt repayment efforts because you'll only have one payment to take care of.
  • It can boost your financial health. Debt counselors don't just focus on your credit. They're trained to look at your financial big picture and provide guidance accordingly. This often includes assessing your income and expenses to help you create a budget that's tailored to your needs. Their advice could include everything from reducing your monthly expenses to increasing your income to understanding how to use credit responsibly.

What Are the Drawbacks of Debt Counseling?

Like anything else, there are some drawbacks to seeking debt counseling. While some debt counseling services are free (more on this shortly), debt management plans typically come with a price. Every credit counseling agency is different, but initial setup fees generally range anywhere from $30 to $50. This is on top of a monthly fee that could set you back roughly $20 to $75.

Another downside of debt management plans is that they don't normally include all types of debt. Mortgages, car loans and student loans, for example, are usually off limits. What's more, you'll have to close the credit cards that are included in the plan, which will reduce your available credit. This, in turn, could drag down your credit score.

It's worth mentioning that there are no "quick fixes" or shortcuts when it comes to improving your credit. Even if you do choose to work with a debt counselor, strengthening your financial health ultimately falls on you to follow through with their guidance.

How Much Does Debt Counseling Cost?

As previously mentioned, enrolling in a debt management plan often comes with fees. With that said, there are many nonprofit credit counseling services that offer free initial consultations. These agencies are designed to educate the public about personal finance, which is why they aren't known for charging excessive fees. For-profit services, on the other hand, can be another story. Some may entice you with promises to magically repair your credit in exchange for exorbitant upfront fees—this is a red flag that you're likely getting scammed. Be sure to get price quotes in writing before making a commitment.

At the end of the day, debt counseling is meant to strengthen your financial outlook and make your debt feel more manageable. If a debt counseling agency is adding to your financial stress, it's OK to walk away and find another service. It's important to be patient, however, and recognize that while you might not like what a credit counselor has to tell you, they're an unbiased third party with an expertise in personal finance.

How to Find a Debt Counselor

Narrowing your search to nonprofit credit counseling agencies is the best approach, as you want a counselor who's certified and acting in your best interest. Part of the journey is also understanding your rights. As a consumer, you can cancel debt counseling services whenever you like. Agencies are also legally obligated to provide written contracts for their services. Know that you can also report a debt counseling agency for any wrongdoing by reaching out to the office of your state's attorney general.

Additionally, organizations like the Financial Counseling Association of America and the National Foundation for Credit Counseling are trusted sources for locating a certified credit counselor. You can also find an updated list of approved credit counseling agencies in your state by consulting the U.S. Department of Justice website.

Alternatives to Debt Counseling

It may be possible to tackle your debt on your own without debt counseling. Exploring financial assistance programs may provide resources that create breathing room in your budget so that you can direct more of your income toward debt repayment. Resources like the 211 Network, Benefits.gov and USA.gov are great places to start.

Making a realistic plan for getting out of debt also comes down to understanding your income, expenses and spending habits so you can build an effective budget. On top of that, you can look to your creditors to see if they're open to reducing your interest rates. Another action item is finding a do-it-yourself debt repayment plan that feels right to you. The snowball approach and avalanche method, for example, are two different strategies that can help you successfully repay your debt.

If your situation is dire and you're hoping to avoid bankruptcy, debt settlement may be a last-resort option. This involves working with a for-profit debt relief company that usually asks consumers to stop making their debt payments. Instead, you'll make payments into a savings account that's set up by the debt relief company. From there, they'll negotiate with creditors to see if they can satisfy the debt for an amount that's less than what you owe.

It's a process that can take years—and all the while, your missed debt payments will drive your credit score further and further down. Debt relief companies also charge consumers for their services. Consider this option if your only other choice is declaring bankruptcy.

The Final Word on Debt Counseling

The best debt counseling services are often nonprofit agencies that have consumers' best interests at heart. Their services, which are typically free or relatively inexpensive, are designed to help folks strengthen their finances and make a plan for repaying their debts. This mission goes hand in hand with financial empowerment. Checking your free credit score and credit report with Experian can help you take control of your financial health and stay on top of your credit over the long haul.