How Much Does Credit Counseling Cost?

What Is Credit Counseling?

Credit counseling, also known as debt counseling, involves working with a trained advisor who helps you evaluate your financial situation and find solutions for your issues with debt. Credit counseling has multiple steps:

• A 30- to 60-minute counseling session where you go over your income, expenses, savings and debts. These initial counseling sessions are often free.
• Financial education tools, such as articles or workshops, that help explain various elements of personal finance and managing debt.
• An optional debt management plan (DMP) designed to pay off your debt over two to five years. The counseling agency works with your creditors to reduce your interest rates and, possibly, lower your monthly payments. Then they roll all of your monthly debts into a single payment, which you pay to the counseling service, until all your debts are paid.

Working with a credit counseling service helps in a few different ways.

For one, it simplifies your monthly payments so you're less likely to forget making a payment on time. You also know exactly how much money you need to cover all of your debts for the month.

A DMP often requires you to close your credit card accounts as part of your payoff plan. As painful as that may sound, it helps prevent you from incurring more debt as you work to pay off your credit cards.

Learn more: How Does Credit Counseling Work?

Debt Management Plan vs. Debt Settlement

A DMP is not the same thing as debt settlement, where a paid representative negotiates with creditors to reduce the amount of debt you repay. While debt settlement may offer some relief, it also can hurt your credit.

The settlement process often requires you to stop making debt payments, which show up as late payments on your credit report. Settled accounts appear as negative information on your credit report as well.

Debt settlement can also be costly. Debt settlement companies typically charge between 15% and 20% of your total debt to handle your case. If you're contemplating this strategy, make sure the cost of settlement plus the damage to your credit don't outweigh the potential benefits of settlement.

Learn more: What Is the Difference Between Credit Counseling and Debt Settlement?

Is Credit Counseling Expensive?

Nonprofit credit counseling is meant to be a low- or no-cost resource for people who need help managing their debt. If you're unable to pay due to financial hardship, they may waive fees and provide services for free. Here's how typical fees break down:

• Free initial consultation: Many credit counseling services begin with a free consultation to discuss budgeting, debt and options to improve your finances.
• Free financial education: Credit counseling agencies may also offer free workshops or other educational services to help you boost your financial knowledge.
• Debt management plans: If you decide to move forward with a DMP, you may pay a setup fee plus a monthly service charge for administering your debt payments. As part of your DMP, the counseling service may negotiate lower interest rates or payments, which may help offset your fees.

Fees vary from one agency to the next and by state. Every state has its own regulations.

Example: In Texas, DMP setup fees are capped at $140, with monthly service fees limited to $14 per account or $70 total. In California, DMP fees may not exceed $35 or 8% of the total amount paid to creditors (whichever is less), plus a $50 education and counseling fee.

You also may qualify for a fee waiver based on your income or military service.

Though individual fees are typically low, they can add up over time. If your DMP has a $50 setup fee and a monthly fee of $40 for 60 months, you'll pay $50 + ($40 x 60) = $2,450 if you pay back your debt over five years. On the other hand, debt counselors can often negotiate lower interest rates on your behalf, potentially saving money to offset fees.

Pros and Cons of Credit Counseling

There are many benefits to credit counseling, but this approach has drawbacks as well. Consider the pros and cons of credit counseling as you're working through your options.

How to Find a Credit Counselor

Before you turn over personal financial information and, potentially, your hard-earned cash, make sure you're working with a trusted credit counseling service. Scams posing as financial services abound, and not all agencies proposing to help you manage your debt are low-cost and nonprofit. Here are a few steps to take to find a reputable credit counselor.

1. Look for a Nonprofit Credit Counseling Service

The National Foundation for Credit Counseling (NFCC) refers consumers through its network of member agencies nationwide. Foundation-certified counselors undergo training and adhere to professional standards. NFCC members are committed to providing affordable services to credit-challenged consumers.

The Financial Counseling Association of America also offers referrals. Its members agree to the association's standards and best practices, which includes adhering to IRS rules regarding nonprofit credit counseling agencies.

Tip: For-profit debt settlement or credit repair companies may look like nonprofit credit counseling services, but they offer different services and may cost you significantly more money. Before you agree to work with any agency, get a clear rundown of services and fees.

2. Check for Government Approvals

The U.S. Department of Justice maintains a list of approved credit counseling agencies. You can visit the Justice Department website to search by state or judicial district.

Also check with your state attorney general's office to learn more about credit counseling regulations in your state and look for a list of approved agencies.

3. Talk One on One

Once you've identified some options, contact agencies and learn more about their services. Four questions you may want to ask:

• What is your process for helping people get out of debt?
• What are the potential fees you charge for your services?
• How do you protect your clients' financial information?
• What impacts to my credit can I expect if I work with you?

Ideally, you want a debt counselor who's trustworthy and easy to work with, and a plan of action you can follow and afford. If you aren't convinced, keep looking.

Alternatives to Credit Counseling

Credit counseling can help you take on issues with managing your personal debt, but it isn't your only option. Consider these alternatives for paying off credit card debt:

Debt Avalanche

To do the debt avalanche, budget as much money as possible each month to use toward paying down credit card debt. Make minimum payments on all of your debts except the one with the highest interest rate. Use all of your remaining debt payment money to pay down the highest-rate debt until it's entirely paid off. Then, pay off the next-highest-interest debt the same way, until everything's paid off.

Debt Snowball

The debt snowball is similar to the debt avalanche, but instead of starting with your highest-interest debt, you start with the debt that has the smallest balance. When it's paid off, you can take aim at the debt with the next smallest balance and continue until all of your debts are paid off.

Balance Transfer Credit Card

A balance transfer credit card lets you transfer high-interest credit card balances onto a new card with a low or 0% introductory APR. If your credit is good enough to qualify and your balances are relatively low, a new balance transfer card can help you save on interest while you pay off your debt. Downsides: You may pay upfront interest and fees, and you'll need discipline to pay your balance down consistently without running up additional debt.

Learn more: What Is a Balance Transfer Fee?

Debt Consolidation Loan

A debt consolidation loan is an unsecured personal loan you use to pay off your credit card balances. You'll still carry debt, but usually at a lower interest rate than your cards charge. Debt consolidation loans also provide structure: You pay the same amount monthly for a set period of time—typically three to five years—and then you're done with your debt.

Personal loans are available for borrowers with a range of credit scores, but you'll have better luck finding a favorable interest rate and terms if you have good credit. Use Experian's loan comparison tool to learn more about debt consolidation loans and see a list of loans personalized to your credit profile.

Negotiating Directly With Creditors

You can negotiate with creditors yourself to work out temporary forbearance, renegotiate card terms, create a do-it-yourself DMP or ask for a settlement. Before you act as your own advocate, make sure you have a clear plan for what you want and be prepared for mixed results.

Be aware: Creditors aren't required to negotiate with anyone, so this strategy may not work. However, the worst thing that can happen is they say no, so negotiating may be worth trying.

Learn more: Does Forbearance Affect Credit?

Bankruptcy

If none of the alternatives above will work and your debt is unmanageable, you may need to consider Chapter 13 or Chapter 7 bankruptcy. Bankruptcy can help you reorganize and discharge your debt, but it does significant damage to your credit, with consequences that can last up to 10 years.

Frequently Asked Questions

The Bottom Line

As you work toward resolving your debts, monitoring your credit score and report can help you track your progress. In the process, you may also improve your credit. Taking on your challenges with debt isn't a fast fix. But getting objective help and guidance from a trained debt counselor can be a productive step toward finally taking charge of your finances.