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Credit Counseling: What Is It and How Does It Work?

Lantern Comp Guide: Credit Counseling: What Is It and How Does It Work?
Lauren Ward
Lauren WardUpdated September 6, 2023
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If you’re looking for help to manage your financial situation, you may be wondering, what is credit counseling? Credit counseling helps borrowers take control of their finances. A credit counselor can advise you on such things as the best way to get out of debt or how to set up a sensible budget.Learn more about what credit counseling is, whether it’s right for you, and how to find an experienced credit counselor in your area.

What Is Credit Counseling?

Credit counseling helps borrowers take control of their finances. A credit advisor or counselor can advise you on a wide range of financial issues, including money management, strategies for paying off debt, and budgeting. They will set up a personalized plan to help you manage your specific situation. They may offer free workshops and educational materials in addition to counseling sessions.

How Does Credit Counseling Work?

Credit counseling works by educating people on the importance of financial literacy and debt management. The process typically involves a counselor looking at your finances and offering advice or recommendations. If you need credit counseling, the key is to find a reputable credit counseling organization with trained and certified counselors.The U.S. Department of Justice has an extensive list of approved credit counseling agencies within each state and U.S. territory. Once you find a reputable credit counseling service, the organization may match you with a credit advisor who reviews your financial situation, listens to your concerns, and offers suggestions on steps you could take to improve your finances.A credit counselor or credit consultant can typically help you with a variety of things, including:
  • Creating a realistic budget for spending and living within your means
  • Enrolling in a debt management plan (DMP)
  • Reducing monthly expenses
  • Refinancing debt for a lower monthly payment or lower annual percentage rate (APR)
  • Avoiding foreclosure
  • Recovering from bankruptcy
  • Building your credit

What’s the Difference Between a Credit Counselor and a Debt Settlement Agency?

A certified credit counselor is a financial expert who offers advice on debt management. Credit counselors may work for nonprofit credit counseling agencies that offer a variety of services, including DMP services. A credit counselor may be right for you if you’re seeking basic education on financial literacy.A debt settlement agency, meanwhile, is typically a for-profit company that arranges to settle your debts if you’re willing to pay for the service. Debt settlement is an agreement between a debtor and creditor that may involve some amount of debt forgiveness.Debt settlement agencies generally are not in the business of credit counseling, but a debt settlement agency may be right for you if you’re willing to pay a company that arranges debt settlements on your behalf. Any debt forgiveness you receive in a debt settlement agreement may be subject to income taxes.

Will Credit Counseling Damage Your Credit Score?

Given the importance of a credit score, a concern you may have is does credit counseling hurt your credit? Credit counseling itself will not directly impact your credit score.However, some of the strategies the counselor might suggest for you, such as closing credit card accounts, could potentially cause your score to dip temporarily. How long your credit score might be affected depends on your specific financial situation.In the long run, using credit counseling to get out of debt could help improve your financial health overall. But it’s important to know that your credit score can be affected as you work to get out of debt. Checking your credit score can help you keep tabs on it.Recommended: What Is a Good Credit Score?

Who Needs Credit Counseling?

You may want to consider credit counseling if you’re having trouble making payments on your debt or if you’ve been denied access to credit more than once and you’re not sure why.However, anyone who would like some guidance with their credit and financial plans may benefit from credit counseling. From borrowers who have a lot of debt, to those looking to purchase a home, a credit counseling session might provide the necessary knowledge and tools to help you.

When to Use Credit Counseling

While credit counseling may be a good resource for anyone looking to get out of debt, it might also be helpful for a number of other reasons. Overall, it may help borrowers strengthen their financial situation.Consider contacting a credit counselor if you need help with any of the following:
  • Creating a budget and sticking to it
  • Guidance on how to read a credit report and dispute any errors it may contain
  • Buying a home
  • Making student loan payments
  • Managing debt 
  • Taking out a reverse mortgage
  • Refinancing a mortgage 
  • Bankruptcy
  • Foreclosure

What Happens in a Credit Counseling Session

During a credit counseling session, the credit counselor will discuss any money issues you may have. They will typically review your income, debts, and spending habits, and with your permission, they may also review your credit report. They will then offer advice on how you might proceed to improve your monthly finances. They will work with you to come up with a personalized plan to help you overcome any financial challenges and meet your goals.

Who Is a Credit Counselor?

What is a credit counselor? A credit counselor is someone certified to counsel borrowers on financial matters. There are a variety of organizations that offer certification, including:Each counselor goes through extensive training before they can be certified. They may be required to continue their education and training to maintain their certification. 

Tips for Finding a Credit Counselor

As mentioned earlier, the Department of Justice has an extensive list of approved credit counseling services within each state and U.S. territory.You may also check out credit counseling agencies with your state’s attorney general and consumer protection agency. A reputable agency should be licensed and accredited in your state.Services offered by some nonprofit credit counseling agencies may be free, including the initial meeting with a counselor. However, there may be some costs involved for credit counseling services, and those costs can vary depending on the agency. Find out what fees, if any, an agency charges before you sign on.Here are additional tips you may consider:
  • Look for a credit counseling agency that offers a range of services, including budget counseling
  • Ask whether counseling is in person or online, and what free educational materials they provide
  • Inquire about any fees and get that information in writing
  • Find out if there is a contract you will need to sign, and review the contract carefully beforehand
  • Inquire about the counselor’s qualifications, training, and whether the counselor has legitimate credentials, such as a counseling certificate granted by the National Association of Certified Credit Counselors
  • Before you commit to a credit counselor, schedule an initial consultation with them which, typically, should be free
  • Make sure you will feel comfortable speaking with the counselor about your finances 

Getting the Most Out of Credit Counseling Services

Gather all your financial information ahead of time in order to be prepared for your sessions with the counselor. It’s helpful to provide the counselor with as much information as possible about your income, debts, and spending habits so they can advise you about how to proceed.It’s also important to ask lots of questions and take notes. Here are some questions you may ask:
  • Are you a nonprofit or for-profit company?
  • What services do you provide for free?
  • What are your fees?
  • Can I get my money back if I’m unsatisfied with your fee-based services?
  • Are you certified by an outside organization?
If the counselor recommends a specific course of action that’s unfamiliar to you, be sure to do some research on it so that you thoroughly understand it. And if they suggest a specific plan — such as a debt management plan, in which you deposit money into an account at the agency for them to help you pay off your debt — make sure you understand exactly what it entails. Also ask about any fees involved with enrolling in a DMP.

Will Credit Counseling Help You to Get a Personal Loan?

If credit counseling helps you reduce debt and improve your financial health overall, that might be helpful if you apply for a personal loan. But simply working with a credit counselor will not in itself improve your odds of getting a personal loan. Lenders may look at the following personal loan requirements to determine an applicant’s eligibility and creditworthiness:
  • Monthly income
  • Monthly debts
  • Credit history
  • Credit score
Credit counseling is generally not a prerequisite for getting a personal loan, but it’s typically required for anyone filing for bankruptcy.  If you’ve been denied a loan and you’re not sure how to improve your financial situation, speaking with a credit counselor might be helpful.

The Takeaway

Credit counselors can help borrowers manage their debt, establish and stick to a budget, and improve their overall financial health. If you’re considering credit counseling, look for a reputable credit counseling agency that is licensed and accredited in your state and that has trained and certified counselors.

3 Personal Loan Tips 

  • Shopping around helps ensure that you’re getting the best deal you can. Lantern by SoFi makes this easy. With one online application, you can find and compare personal loan offers from multiple lenders.
  • If the interest rates you’re being offered seem too high, try lowering the loan amount. Generally, the larger the loan, the greater the risk for lenders, who likely charge a higher interest rate for the increased risk level.
  • Watch out for lenders who advertise “guaranteed” loans. Legitimate lenders will want to know your creditworthiness before offering a loan.

Frequently Asked Questions

How do I choose a credit counselor?
How do I find a credit counselor?
Can credit counseling help me get approved for a personal loan?

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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