Credit Card Counseling Pros and Cons

Knowledge is power. Boosting your financial knowledge can give you the power to take control of your finances—and your debt. 

Best of all, you don't have to do it on your own. A credit counseling agency is one place where you can learn about finances and create a plan to tackle your credit card debt.

What is a consumer credit counseling agency?

Consumer credit counseling agencies are usually nonprofit organizations that provide money management advice and debt help. They offer workshops and resources on personal finance and debt. For example, a credit counseling agency could help you:

• Create a budget

• Check your credit reports and scores

• Manage your spending

• Build a debt management plan

• Set financial goals and start saving

If you’re struggling to pay off your debt, a credit counseling agency may help. Depending on how much you owe, they could give you resources and advice to help you get rid of debt. Or they might offer a debt management plan to help you free yourself from debt.

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What is a debt management plan?

Consumer credit counseling agencies can help you build a debt management plan (DMP, sometimes called a debt management program). Think of it as a guided step-by-step plan to get a handle on your debts. 

A DMP has a few major benefits:

• Potentially lower credit card interest rates. Your counselor might negotiate with your creditors to reduce your interest rate and/or waive certain fees.

• Simpler repayment process. As part of the debt management plan, the credit counseling agency will be the intermediary for your debt payments. You'll make one monthly payment to the nonprofit credit counseling agency, and the agency will then pay your individual creditors.

• Help from experts. Credit counselors are part advisor and part teacher, giving you the tools and resources to manage your debt as well as the knowledge to stay on top of your finances going forward.

There are some tradeoffs you should be aware of:

• You’ll pay off your debts in full. There is no debt forgiveness. Credit counseling agencies are inexpensive for you because they’re funded by credit card companies. Both the agency and the financial institution want you to pay your debts back in full, generally within three to five years. Lowering the interest rate is their way of making it a little easier to manage the monthly payments.

• The monthly payment can be very high. Most people don’t complete their DMP. A common reason is that the payment is so high, they can’t afford to keep up.

• You’ll have to close your credit accounts. Your creditors don’t want you to rack up more debt while they’re doing you the favor of lowering interest rates and fees. If they let you keep one credit account open, you may be asked not to use it. They might periodically check your credit reports to make sure you’re sticking to the agreement.

• Unsecured debts only. Debt management plans can’t help you with secured debts like car loans, motorcycle loans, or mortgages. They are for credit cards and other unsecured debts owned by creditors who are willing to participate.

Debt management plan vs. debt settlement

A debt management plan is different from credit card debt relief or debt settlement. Credit card debt settlement is when your card issuer agrees to accept less than you owe to settle your credit card debt.

A DMP doesn't reduce how much debt you owe. However, a debt management plan could still save you money on fees and interest charges if you get a lower rate and you can afford the required payments.

How a debt management plan works

The process is fairly simple. Here's a brief rundown:

You request an evaluation by a credit counselor. You'll discuss your income, expenses, debts, and other financial obligations and goals. The counselor can also help you pull your credit reports to check on your credit health and get a full accounting of your open accounts.

If you qualify, the counselor can then help you enroll in a DMP. The two of you will discuss which debts can be included, how much you can pay each month, and how you’ll handle your other bills outside the program. 

The credit counselor negotiates. Then, the credit counseling agency contacts your creditors to negotiate a lower interest rate. This reduced rate is called a concession rate. When your creditor agrees to the new terms, you countersign the agreement and start your DMP.

You’ll pay fees. After your DMP is set up, you’ll pay a start-up fee. Then you’ll make monthly payments into an account that the credit counseling agency uses to pay your creditors. Your credit counseling agency will also collect a monthly fee for maintaining your DMP. 

You’ll close your credit accounts. Expect credit score damage when you close credit accounts that still have a balance. That’s normal. Building a history of on-time payments and clearing your credit card debts are two giant steps toward a good credit standing.  

You make your payments. You continue to pay into your DMP account, and your credit counseling agency continues paying your creditors until all your debt is gone. This process usually lasts three to five years.

You must make regular payments on time per your plan. If you don’t, your creditors can back out of the agreement, and your accounts will go back to their regular interest rates. You’ll lose out on any other benefits your credit counselor negotiated for you. 

Who should consider a debt management plan

A debt management plan isn’t for everybody. But it could be right for you if you:

• Can afford to make a substantial monthly payment toward your debts.

• Intend to repay your debts in full.

• Don’t want to file for bankruptcy or you don’t qualify.

• Want to learn how to maintain a good credit score.

• Feel ready to tackle your debts but you need a bit of guidance. 

How do you qualify for a debt management plan?

Whether you qualify for a debt management plan will depend on your individual circumstances, including the amount, type, and terms of your debts. There's no minimum debt amount to qualify for a DMP.

Your income will also be a factor in eligibility for a DMP. If you don't make enough money to repay your debts, you may not qualify for a debt management plan.

Most nonprofit credit counseling agencies will offer your first session free so you can find out if you qualify for a DMP without forking over a big fee. 

Credit Card Counseling Pros and Cons

As with anything, there are both pros and cons to credit counseling and a debt management plan. Make sure to consider the potential drawbacks as well as the benefits.

Credit Card Counseling Pros and Cons: Quick View

Benefits of Consumer Credit Counseling

The pros of credit counseling include saving hassle and money:

• Single monthly payment. If you're looking to simplify your finances, a DMP helps by consolidating multiple debts into one payment. There's no more worrying about having different due dates or double-checking to see if you've paid each creditor the correct amount.  

• No new loan needed. DMPs allow you to consolidate your existing debt without taking on a new loan. 

• Lower interest rates. Credit counseling agencies negotiate with your creditors to reduce interest rates, fees, and finance charges. The goal of DMPs is to allow you to pay off existing debt within 60 months (five years). 

• Financial education. Experienced credit counselors help you create a workable budget and build better financial habits. 

• Reduced collection calls. Once creditors agree to work with you through a DMP, phone calls, emails, and letters related to collection attempts on those accounts should slow down or stop altogether. 

• Credit score improvement. Regardless of your current credit score, completing a DMP could improve your credit score over time. Making consistent, on-time payments is key. 

• Professional financial advice. When you work with a credit counselor, expert advice is tailored to your unique financial situation. 

Disadvantages of Consumer Credit Counseling

Credit counseling may be a good option if you have modest debts. However, there are disadvantages. Here are some of them:

• Qualification challenges. If you carry large debts but don't earn enough to comfortably cover them, you may find it difficult to qualify for a DMP. In addition, some creditors may not agree to participate in your DMP, which would mean carrying on with separate repayment plans. 

• Limited to unsecured debt. A DMP only works with unsecured debt like credit cards and personal loans. If making a mortgage or auto loan payment is tough, a DMP won't help. DMPs also don't deal with student loans. 

• No new credit. While enrolled in a DMP, you can't use existing credit or open new credit accounts, which may be hard. You’ll also have to close credit accounts to prevent new debt from accumulating. 

• Fees. There are usually fees associated with DMPs, including a start-up fee and ongoing monthly fees. These fees vary by credit counseling agency, so you'll have to research to find a program you can afford. Typically, the initial setup fee averages around $38, while monthly fees average around $27 a month.

• Initial credit score impact. You're likely to notice a dip in your credit score at first if your DMP involves closing credit card accounts. Credit scores can and do change over time, based on how you’re handling your credit accounts. Clearing your debts could put you on firmer financial footing, which puts you in a better position to build strong credit in the future.

• Principal amount unchanged. A DMP can result in decreased interest rates and reduced fees, but it won't change the principal amount owed.  

How to find the right credit counseling agency for you

Whether you’re seeking help with your budget or need to enroll in a DMP, these resources could help you find a credit counseling agency:

• The U.S. Department of Justice has a credit counseling search tool that could help you locate approved consumer credit counseling agencies in your area.

• The National Foundation for Credit Counseling (NFCC) also offers a search tool for credit counseling agencies near you. The NFCC is the largest nonprofit financial counseling organization in the U.S.

• You can also consult the Financial Counseling Association of America to find a credit counseling agency in your state.

Not all credit counseling agencies are legitimate, so before you contact a credit counseling agency be sure to:

• Find them through one of the links above

• Check out their customer reviews online.

• Verify that they are licensed and accredited in your state.

• Verify that they are accredited by the NFCC, the FCAA or both.

If they don’t meet these criteria, you may want to keep looking. 

Also watch for these other red flags:

• Credit counselors who aren't certified or accredited by a third-party organization such as NFCC.

• Upfront fees before they negotiate any new terms with your creditors.

• Guarantees that using their service will improve your credit score.

• Pressure to enroll you into a DMP without telling you about your other options.

• Skimpy information about fees or how their DMP works.

Legitimate credit counseling agencies won’t have any of these characteristics.

Credit counseling agencies: The bottom line

Credit counseling agencies can offer multiple ways to deal with debt stress, from free resources to debt management plans. With their help, you could be debt-free faster and for less money than it would take to pay off your debt by making minimum payments. But, like all other debt-relief options, credit counseling has pros and cons.

If you’re deep in debt and having trouble making minimum monthly payments, a credit counseling agency may not be the best choice. Weigh all your debt relief options before committing to one.