How does Credit counseling work

Writer and editor - Bryan Robinson | Updated on 2023-03-05

What is credit counseling?

Credit counseling is a process that helps individuals struggling with debt to develop a plan to repay their debts. Credit counselors work with creditors to develop a repayment plan that is affordable for the debtor and meets the creditors’ needs. In some cases, credit counseling may also involve negotiating reduced interest rates or decreases in monthly payments.

How does credit counseling work?

Credit counseling is a process that involves working with a credit counselor to review your finances and create a debt management plan. The goal of credit counseling is to help you get out of debt and improve your financial habits.

During credit counseling, you will work with your credit counselor to review your income, expenses, and debts. You will also learn about budgeting and financial management. Then, as mentioned above, once you have reviewed your finances, your credit counselor will work with you to create a debt management plan.

The debt management plan will involve making payments to your creditors through a credit counseling agency. The payments will be made on your behalf and will be based on what you can afford to pay. The goal of the debt management plan is to repay your debts in full within a certain period of time, usually 3-5 years.

What are the benefits of credit counseling?

Credit counseling can be beneficial because it can help you:

  • Get out of debt
  • Learn money management skills
  • Create a budget
  • Rebuild your credit

What are the drawbacks of credit counseling?

There are a few potential drawbacks to credit counseling, including:

You may have to give up your credit cards: If you enroll in a debt management plan (DMP) through a credit counseling agency, part of the agreement may be that you surrender your credit cards. This can disrupt your financial life if you rely on your credit cards for everyday expenses.

You may have to pay fees: Most credit counseling agencies charge fees for their services, either on a sliding scale based on your ability to pay or a set fee. Some also charge an enrollment fee, which can be up to $50. Be sure to ask about fees before you sign up for any service.

Your debt problems may not go away: Even if you successfully complete a DMP, your financial problems may not be over. You may still have to deal with the underlying cause of your debt problems, such as overspending or taking on too much debt. And you may still have to repay all of your debts in full.

Bryan Robinson

Bryan Robinson
Writer and editor

Bryan Robinson is a finance writer with expertise in lending and their interest rates, fees, contracts and more.
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