How Much Does Credit Counseling Cost?

When Should You Work With a Credit Counseling Company?

You may be able to manage your outstanding debt yourself. Debt payoff apps can organize your bills and payments, and strategies like the debt avalanche or debt snowball method can help you pay off your debt faster and save money.

However, if you find yourself overwhelmed by debt and unsure how to handle it, credit counseling may be a wise move. Credit counseling is worth exploring in the following situations:

1. Your debt is building. If your balances are growing instead of shrinking every month, credit counseling can be essential. A credit counselor will work with you to review your bank and credit card statements to find out where your money is going and to develop a budget. The counselor will help you identify expenses you can reduce or eliminate so you can put more money toward your debt repayment. 
2. You’re at risk of missing payments. If you can’t afford your payments or won’t be able to soon, contacting a credit counselor is a good idea. The earlier you work with a counselor and contact your creditors, the more options you’ll have. 
3. You’re considering filing for bankruptcy. Before moving forward with bankruptcy, meet with a counselor to review your finances and discuss your options. Debt management plans don’t have the severe financial and credit consequences of bankruptcy.
4. You’re committed to becoming debt-free. A debt management plan is a serious commitment. You have to close any credit cards enrolled in the program, so it’s best for those who are dedicated to getting rid of their debt as quickly as possible and who are willing to make significant lifestyle changes.

Thomas Nitzsche, a financial educator with Money Management International, said the advantages of credit counseling and debt management plans can be significant. 

“The primary benefit of a debt management plan is reduced interest rates on included accounts, averaging about 7% APR,” he said. “However, there are several other benefits, including a consolidated monthly payment, long-term credit score improvement, waived late and over-limit fees going forward, and some creditor accounts being brought current without making up past due payments.”

Take note that while a DMP won’t raise your credit score directly, building up a record of on-time payments, paying down your balances, and removing delinquencies can improve your credit.

Is Credit Counseling Risky?

Getting counseling from a certified credit counselor can be incredibly helpful (and your initial consultation is free), but there are some downsides to consider: 

• You’ll have to give up your credit cards. You typically need to close any credit cards enrolled in a debt management plan, which means you may need to commit to using debit cards and/or cash until the program is complete. If you rely on credit or travel often, that requirement can be difficult to follow. 
• Closing credit cards may hurt your credit score. When you close the credit cards in a DMP, your credit utilization rate may go up, which can negatively affect your credit score.
• You may not be able to apply for new credit. Under a debt management plan, your creditors may penalize you if you take on new credit, so you couldn’t apply for a new car loan, for example, until the DMP ends.
• DMP notation on credit reports could be a red flag. DMPs don’t directly impact your credit score, but accounts enrolled in a DMP may be noted as such on your credit reports. If you apply for new credit in the future, lenders may see these notes and make decisions based on them. On the other hand, DMP notations also show that you cared about paying off your debt.

However, other forms of debt relief—such as debt settlement companies—are much riskier. 

“Debt settlement companies are for-profit organizations that offer to negotiate a reduction in the total amount you owe,” said Bruce McClary, senior vice president of membership and communications with the National Foundation for Credit Counseling. “These settlements are typically negotiated on a case-by-case basis with varying degrees of success. For-profit debt relief companies often use a very broad approach to negotiating settlements without an emphasis on an individual’s overall financial health.”

How Much Do Credit Counseling Alternatives Cost?

If you’re considering other options along with credit counseling, here’s how much you can expect to pay for those alternatives.

• Debt consolidation/refinance loans: With debt consolidation/refinance loans, you replace your existing debt or debts with a new loan (ideally with a lower interest rate to help you save money). Rates and fees vary by lender and your credit, but you may have to pay origination fees on top of interest charges.
• Balance transfers: You can transfer debt to a 0% APR balance transfer credit card and pay it down at no interest for a set period of time. Transferring a balance usually requires a fee—typically 3% to 5% of the transferred amount. And once the promotional APR expires, the regular APR will apply to the remaining balance and interest will begin accruing. 
• Debt settlement: Debt settlement involves negotiating with your creditors to pay less than you owe to close the accounts. Debt settlement companies can be expensive; the fees range from 15% to 25% of the amount settled, and the forgiven balance may also be taxable as income.
• Bankruptcy: Filing for bankruptcy may be a good idea if your debt is insurmountable, but declaring bankruptcy can be expensive. Filing costs are over $300 for Chapter 13 and Chapter 7 bankruptcy. Under Chapter 13, you may also have to pay a trustee 10% of each debt payment as a commission. In addition, attorney fees can cost more than $2,000 in some cases. Due to these fees and commissions, bankruptcy can cost thousands. 

The Bottom Line

If you’re struggling to pay down your debt and get your finances under control, credit counseling can be an excellent idea. A counselor can help you learn to budget and manage debt more effectively going forward. And costs can be quite low. If you work with a reputable nonprofit credit counseling agency and you meet certain income requirements, the fees may even be reduced or waived. 

Whether you decide to work with a counselor or aggressively pay down your debt on your own, it’s important to take steps right away to start managing your debt. Coming up with a plan and taking steps now to pay it will pay off in the long run. 

What Is the Average Cost of Credit Counseling?

According to Investopedia research, initial consultations are typically free, and the average fees for debt management plans were as follows:

• Enrollment fee: $40 to $65
• Monthly fee: $29 to $54

How Do I Find a Credit Counseling Company?

To find a credit counseling agency, follow these steps: 

1. Look for an agency affiliated with major associations. Start your search by contacting a reputable accrediting organization, like the Financial Counseling Association of America (FCAA) or the National Foundation for Credit Counseling (NFCC).
2. Check the agency’s reputation. Once you have a preliminary list of agencies in your area, look up the agencies on the websites of your state attorney general and local consumer protection agencies. These sites can show you the complaints consumers submitted about the agencies.
3. Set up a consultation. After narrowing down the list of prospective agencies, you can set up an initial consultation with a credit counselor.

What Is a Debt Management Plan?

A debt management plan is a structured plan that’s developed by working with a credit counseling agency. For any debts enrolled in the plan, the credit counselor will work on your behalf to contact your creditors to negotiate lower rates and potential fee waivers. Your monthly payment may be reduced.

You make one lump sum payment directly to the credit counseling agency, and it distributes the payment according to the agreed-upon schedule to each of your creditors. Under the plan, you’ll usually pay off your creditors within five years.

Does Credit Counseling Hurt Your Credit?

Debt management plans through credit counseling agencies don’t directly impact your credit, but they may affect it indirectly. You’re usually required to close any credit card accounts enrolled in a debt management plan. Closing your accounts will lower your available credit, which affects 30% of your FICO credit score.

Is Credit Counseling a Good Idea?

If you’re overwhelmed by your debt and aren’t sure where to start repaying it, credit counseling can be a useful option. A credit counselor can help you develop a budget, identify areas to reduce your spending and, if needed, enroll you in a debt management plan. The counselor may negotiate lower rates to help you save money as you get your finances on track and pay off your debt. 

However, credit counseling isn’t free for most, and it only works for certain kinds of debt. Secured debt—such as home loans or auto loans—isn’t eligible for debt management plans, although credit counselors may be able to offer advice and resources to help.