September 9, 2024

What is Credit Counseling? How Does it Work?

Trying to understand how credit works can feel overwhelming, especially if you’re facing debt or other credit issues. If you want professional help to better manage your credit and understand how it works, you might want to consider credit counseling.

But what is credit counseling?

A general definition of credit counseling is a service that helps people manage their finances, offering guidance and strategies to improve financial stability. Here’s a more in-depth look at how it works.

What is credit counseling?

Credit counseling is a professional service that helps people understand their financial situation and gives them the tools to address money challenges or meet financial goals. With this service, a credit counselor reviews your credit history, debts, and other relevant information to assess your situation. Then, they offer personalized advice and strategies.

One of the primary goals of credit counseling is teaching consumers about how to build and maintain good credit, whether you're dealing with credit card debt, considering a debt consolidation loan, or can’t get a loan because of a low credit score.

People often seek credit counseling when facing debt challenges due to job loss, financial or medical emergencies, or poor money management. Credit counseling offers a structured approach to address these troubles, no matter where they come from.

How does credit counseling work?

Typically, the counseling process begins with an initial consultation with a counselor to discuss your financial situation. They'll review your credit report, monthly income versus expenses, and any outstanding debts to gain a clear picture of your financial health.

During the session, the counselor will discuss your financial goals, budgeting habits, and any money challenges you face. They'll offer potential strategies to address these challenges, like consolidating your debt, enrolling in a DMP, or seeking other forms of debt relief.

Your willingness to be open and honest with your counselor about your financial situation can significantly enhance the session’s effectiveness. The more transparent you are with your counselor, the better they can tailor their advice to your needs.

What services do credit counselors provide?

When you work with credit counseling services, you’ll receive help tailored to your unique financial situation. Here are some of the primary services credit counselors offer:

1. General budgeting: A good budget is the foundation of any sound financial plan. A credit counselor will help you create a realistic budget after reviewing your income, expenses, and financial goals. Sticking to a well-structured budget can help you avoid taking on more unnecessary debt and spending beyond your means.

2. Debt management plan (DMP): A DMP consolidates your debts into a single monthly payment, often with reduced interest rates and waived fees. The credit counseling agency will negotiate with your creditors on your behalf to create a plan that makes it easier for you to pay off your debts over time.

3. Student loan counseling: Student loan debt has reached high levels nationwide, and many graduates are struggling to make monthly payments. Credit counselors can provide guidance on repayment options, loan consolidation, and strategies to avoid defaulting (failing to meet payment terms) on student loans.

4. Housing counseling: This type of counseling offers valuable insights on topics like mortgage interest rates and home loan modifications. A credit counselor can guide you through the complexities of housing finance, whether you're facing foreclosure, considering buying a home, or struggling with mortgage payments.

5. Bankruptcy counseling: Bankruptcy is a serious decision, and you should only consider it as a last resort for financial struggles. Before diving into credit counseling for bankruptcy, you should see a specialist to make sure you fully understand the implications of bankruptcy and explore all available alternatives.

Many credit counselors also offer workshops and seminars on different financial topics, from how credit scores work to mastering the art of saving. These sessions can help you better understand specific areas of personal finance, make informed decisions with your money, and avoid common financial pitfalls.

How do you find a credit counselor?

Picking a trustworthy and experienced credit counseling service that can help you with your financial situation is essential. But with so many different service providers available, this can be a tricky decision to make. Here are some questions to consider when seeking a credit counselor:

What services do they provide? Make sure the counselor offers the services you need, whether that’s general budgeting advice, a DMP, or bankruptcy counseling. Counselors often specialize in different areas, so you want to find one that aligns with your financial needs.
Are any educational services free of charge? Many reputable credit counseling agencies provide free educational resources to help clients understand personal finance better. These resources, ranging from workshops to online materials, can give you the knowledge to make more confident financial decisions.
What are the service fees? Many nonprofit counseling services charge fees for specific programs, such as DMPs. Ask what costs you can expect upfront so there are no hidden surprises later. This will help you budget appropriately for the counseling service.
What if you’re unable to pay or make contributions? Some agencies offer fee waivers or reductions based on financial hardship. It’s important to discuss your financial constraints with your counselor, as many agencies prioritize helping clients over profits and can provide flexible payment options.
How are counseling employees paid? Knowing whether counselors earn commissions based on the services they recommend is important. This can help you determine if their advice is genuinely in your best interest or influenced by their potential earnings.
What are the counselors' qualifications? Make sure you work with certified counselors who have the necessary training to make sure you’ll receive accurate and up-to-date advice.
Is the company licensed within your state? Licensing guarantees that the agency meets specific state requirements and standards. A licensed agency must adhere to state regulations and provide you with ethical and law-abiding services.

Overcoming debt challenges with EarnIn

While credit counseling services can assist during financial challenges, there are also many tools that can aid in helping you through these difficulties. One solution is EarnIn, an app designed to help users manage their finances more effectively.

With EarnIn’s Credit Monitoring tool, you can keep a close eye on your credit score and make sure you're headed in the right direction. The Cash Out tool is another helpful option if you need access to your pay as you work — instead of waiting days and weeks later. You can get up to $100 per day and up to $750 per pay period with no credit checks, no interest, and no mandatory fees.

Download EarnIn and experience money at the speed of you.

Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.

1. Calculated on the VantageScore 3.0 model. Your VantageScore 3.0 from Experian® indicates your credit risk level and is not used by all lenders, so don't be surprised if your lender uses a score that's different from your VantageScore 3.0. Learn more: https://www.experian.com/assets/consumer-information/product-sheets/vantagescore-3.pdf

2. EarnIn is a financial technology company, not a bank. Subject to your available earnings, Daily Max and Pay Period Max. EarnIn does not charge interest on Cash Outs. EarnIn does not charge hidden fees for use of its services. EarnIn services may not be available in all states. Restrictions and/or third-party fees may apply. For more info visit earnIn.com/TOS.