Credit counseling is a professional service, usually provided by a credit counseling agency, that provides consumers with guidance about credit, the repayment of debt outside of bankruptcy, financial management, and budgeting. Certified credit counselors evaluate clients’ debts, credit, and budget, and help them identify the best way to get out of debt.
The goal of most credit counseling is to help debtors avoid bankruptcy if they find themselves struggling to repay their debts. In order to do so, credit counseling agencies help individuals create debt management plans (DMP) that allow them to make monthly payments towards their debt. Counseling agencies also negotiate with creditors, on behalf of borrowers, to have credit card interest rates, loan interest rates, and late fees reduced. Credit counselors can sometimes negotiate debt relief, where part or all of the principal of a debt is forgiven, or debt consolidation, in which a new loan replaces multiple unsecured credit debts.
Most credit counseling agencies operate on a non-profit basis and offer services in-person, online, and via telephone. There are also agencies that operate on a for-profit basis. For profit agencies earn revenue through fees and tend to be more expensive for consumers. Non-profit agencies are supported through grant money provided by financial institutions. Non-profit agencies usually have lower fees for consumers and charge only for evaluations and the creation of debt management plans. Universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate nonprofit credit counseling programs.
Bankruptcy law mandates that anyone filing for Chapter 13 bankruptcy must first undergo credit counseling. The United States Trustee Program keeps a list of credit counseling agencies approved to provide pre-bankruptcy counseling.
Credit counseling is also called debt counseling or financial counseling.
[Last updated in August of 2021 by the Wex Definitions Team]
