Intro: What is Consumer Credit

Debt can seem overwhelming, especially if you aren’t sure how you can afford to pay it off. Maybe you’re thinking of getting help but have questions. What is consumer credit counseling? What does a credit counselor do? Will it help me? AdvisoryHQ gives you the answers you need to help you make the best decision for your situation.

Money and debt. It sounds easy enough: Don’t spend more money than you have, but the reality is that it’s never quite that simple. We no longer live in a cash-only society, and falling into debt can happen to anyone.

With a majority of Americans living paycheck to paycheck, racking up consumer credit can happen to the most diligent bill-payers among us. With little more than two missed paydays, many of us end up asking ourselves, what is credit counseling and how does credit counseling work? while wondering if it can help our situation.

By the numbers:

Perhaps the most startling thing about those numbers is the associated interest: more than $6,600 in interest every year by every household. It’s a staggering figure when you think about it.

And it’s not because consumers are sloppy with their spending. While household income has grown by 26%, the cost of living has gone up 29%. We’re starting out at a deficit. So, it’s little wonder so many Americans are racking up massive amounts of consumer credit.

See Also: Ways Negative Interest Rates Will Impact You (Review)

What Is Consumer Credit?

Before we can determine whether or not we need help, we need to start by asking ourselves if we know what consumer credit is. “Consumer credit” is the term used to describe the debt that is incurred by the consumer.  It is, essentially, the amount of credit a consumer uses to purchase items that are consumed (think groceries, going to the movies or entrance fees to a theme park), are not investment goods or services, and depreciate quickly (running shoes and clothing, cosmetics, and gaming units).

What Is Consumer Credit

Image Source: What is Consumer Credit

Consumer credit includes purchases of items such as cars and other automobiles (including recreational vehicles), tuition or other education costs, loans for boats or trailers.

Consumer credit does not include debts incurred to purchase real estate or the margin on new or existing investment accounts. It also includes items such as outstanding medical or dental bills. In addition to credit cards, consumer credit includes purchases made with cash advances, loans or independent lines of credit.

Still wondering just what is consumer credit and what isn’t? Here is an example to help you out:  the mortgage on the new house you just bought is not considered consumer credit. However, the ultra high-definition, 65-inch, OLED wall-mount television you purchased using your store credit card is.

Most of us carry a little short-term consumer credit. We make mid-month purchases on our Visa or MasterCard and pay them off when the bill arrives. Credit cards are convenient. If they weren’t, we wouldn’t use them.

Purchasing goods or services using credit cards is not a bad thing by itself, but allowing the debt to accumulate or roll over from month to month is. It can snowball quickly. Before you realize it, you’ve got balances that you can’t easily pay off. That’s when you start making minimum monthly payments out of necessity. You might find yourself wondering, what is credit counseling?

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What Is Credit Counseling?

To help understand the answer to the question what is credit counseling, consider this: credit counseling is a general term given to the process of getting out of debt with the help of someone in the know.

More specifically, it is when a trained credit professional takes a good look at your overall financial situation. After reviewing where your money is coming from and exactly where it’s going, a credit counselor will help you develop your plan of attack. You and your credit counselor will work together, creating an individualized plan that will not only get you out of debt but will help you stay out of it too!

The credit plan typically involves a debt repayment schedule and sometimes a money management plan. Many credit counselors provide free resources, such as workshops or training sessions, to help you understand your money better.

With the guidance of a reputable credit counselor, you will find the process to be very rewarding, despite its initial challenges.

What Is a Credit Counselor?

Now that you have a better idea of what credit counseling is, you may be asking yourself, what is a credit counselor? A credit counselor is a trained individual who works for a credit counseling service or agency. Their role is to help you develop a plan that will put you in control of your money and outstanding debts. Credit counselors will also:

  • Take a look at your overall monetary situation and make recommendations
  • Assist you in understanding how to better use debt and credit responsibly
  • Help you to create a budget that you can live within
  • Talk to your creditors
  • They may help you develop a debt management plan

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How Do I Find a Trustworthy Credit Counselor?

It’s a sad reality, but there can be unscrupulous people out there looking to take advantage of someone in a difficult situation. 

what is credit counseling

Image Source: What is a Credit Counselor

A trustworthy credit counselor will:

  • Work for a reputable organization
  • Be certified/trained in debt management and credit
  • Will have a solid financial education background

Offer a few free services and access to general information to help you get started

They will not:

  • Ask for money up front without providing a detailed breakdown of their fee structure
  • Have a “secret” method of getting this done; something that you couldn’t do yourself

To find a credit counselor, you can contact:

The Federal Trade Commission has also created a website specifically designed to help you select a reputable credit counselor. It provides an overview of where to find counselors, along with sample questions to ask your potential counselor.

Related: How to Manage Your Money – Top Money Management Tips

What Does a Credit Counselor Do?

Now that you can answer the questions of what is consumer credit and what is credit counseling, it’s time to look at the next question: what does a credit counselor do?

The first thing your credit counselor will need from you is information about your finances and your lifestyle. You’ll be asked to provide details about the money you owe –  how much and to whom.  You’ll also need to give an accurate snapshot of your current employment (or lack of) situation as well as any other income details.

For example, do you receive government benefits? How about investment payments? Child or spousal support? The key here is transparency. The credit counselor can only help you if he/she has a clear understanding of what you’re experiencing.

What does a credit counselor do? In a lot of ways, they are like may other counselors and counseling situations. They can only help you when you’re honest about your current situation and committed to making a change.

How Does Credit Counseling Work?

If you’re asking yourself how does credit counseling work, you’re not alone. It can be difficult to sort through all the different information out there to find what you need.

To better answer the question of how does credit counseling work, let’s look at what a counseling service organization actually does.

Credit counseling service organizations teach you how to manage your money and your debt. Typically, after you connect with an organization, a one-on-one session will be booked for you to come into the office for an initial assessment. This evaluation usually lasts for an hour or so. Take full advantage of this free initial consultation and ask questions.

This is the perfect time to see whether or not this is the right person(s) for you. What kind of training do they have? What fees, if any, will you be expected to pay? Will all the meetings take place here, or will they come to your home? You’ll come away with some free advice as well from your meeting, things like:

  • Credit counseling tips
  • Advice on how to improve your credit
  • Suggestions on how to eliminate your debt
  • Information on items such as secured and unsecured loans

Think of the answer to your question, how does credit counseling work? as a three-step plan:

Step One – Assess Your Finances

The goal is to evaluate honestly how good or how bad the situation is and to determine whether or not you will benefit from the services of a credit counselor.

Based on the outcome of Step One, you’ll either go home with some general information (if you don’t need a credit counselor), or if you do need the services of one, move on to Step Two.

Step Two – Take Action

This is when the credit counseling service agency will get involved in your particular situation and help you develop a repayment plan for existing debt. This move will often include the counselor reaching out to your creditors. He/she will see if your creditors will accept partial payment to eliminate the debt, reduce monthly payment amounts or stall accumulating interest.

Step Three – Education

It’s here that you (re)learn about money, and this is the most important step. It’s now that you gain a greater understanding of finances and credit and how they work together. And this new knowledge is the key to your maintaining control of your money for the rest of your life.

What If You Stop Making Payments? How Does Credit Counseling Work Then?

It’s important to realize that the arrangement set in place by your credit counselor is dependent upon you meeting your financial obligations. If you stop making agreed-upon payments, your creditors will likely begin collection efforts and start charging additional interest and penalty fees.

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How Are Debt Settlement Companies Different from How Credit Counseling Works?

Often, the phrases “credit counseling service” and “debt settlement company” are used interchangeably. They both help you reach a similar goal – elimination of debt – but they are very different businesses.

Credit Counseling Services

  • Very often, credit counseling is a non-profit or not-for-profit organization, and that means little/no fees for its services
  • Typically, credit counselors offer guidance and advice on how best to manage your money and your debts; they assist you in budgeting your money
  • Will often reach upfront agreements with your creditors to ensure they will not pursue collection or charge additional late fees
  • Usually do not negotiate a lower, overall reduction of money you owe; instead, often work to lower your monthly payments
  • Provide education on topics such as cash management, budgeting, and appropriate use of credit cards and other debt to help prevent a recurrence of unmanageable debt accumulation
  • Most likely will not be able to eliminate 100% of all of your debts.

Debt Settlement Companies

  • Typically for-profit companies or legal firms
  • Do not usually reach upfront agreements with your creditors regarding collection or additional fees
  • Very often will arrange to pay off your debts with a single lump sum payment, often less than the total amount owing
  • Most will require that you stop making payments to your creditors, for a period of up to six months, in order to be successful in reaching a debt settlement agreement
  • Some creditors will not deal with debt settlement companies preferring to file a lawsuit against you
  • Most do not offer financial education services
  • Most likely will not be able to eliminate 100% of all of your debts

What Is a Debt Management Plan (DMP)?

A debt management plan, in part, answers the question of what does a credit counselor do? A DMP is a formal agreement designed to help you eliminate unwanted or uncontrollable debt.

After reviewing your situation, your credit counselor will suggest a debt management plan. Although it may sound intimidating, a debt management plan typically means little more than arranging for you to make monthly payments to the credit counseling service agency, and they, in turn, pay your creditors. Typically, DMPs are put in place for people who have the ability to pay off their outstanding debt over time but do not initially qualify for a consolidation loan.


  • Reduces the stress of having to manage multiple monthly payments
  • Ensures accuracy in meeting agreed-upon payment amounts
  • Enables better budgeting


  • Since a debt management plan is an agreement, not a legal procedure, some of your creditors may chose not to participate
  • Does not automatically cancel a garnishment order (this must be done by the creditor directly)

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Does Credit Counseling Damage Your Credit Score?

There’s always significant interest around credit counseling, and you might be wondering what does credit counseling do? Will it damage my credit score?

Simply reaching out and talking with a credit counselor doesn’t affect your credit score in any way. Any subsequent action that you take, however, can have an impact. 

For example, to help you curb excessive spending habits, your credit counselor recommends closing out some of your accounts.  Canceling a credit card can affect a credit score, as can partial or missed payments. Your counselor can help you decide which choice is best for you.

How the process with affect your specific situation is one of the questions to ask your counselor during that initial consultation session.

How Much Will It Cost Me?

How much or how little you pay will depend on whether you choose to go with a credit counseling service or a debt settlement company.

Credit Counseling Services

  • Costs vary depending on the complexity of your situation and the debt elimination program selected
  • A monthly $25 fee is common among many debt management service organizations
  • In cases of hardship or for active members of the United States military, fees may be waived outright

Debt Settlement Companies

Since debt settlement companies are for-profit, they typically charge in one of the following methods:

  • A one-time flat fee, typically starting at $1,000. The rate is often based on the amount of money you will “save” by the debt settlement company negotiating on your behalf with any outstanding creditors
  • A percentage fee of your total debt, commonly between 15 – 25%

That means if you owe $9,000 in debt and

  • Choose to go to a credit counselor, you would pay approximately $900, over a three-year debt management plan


  • Between $1,350–$2250 if you decide to go to a debt settlement company (15–25%)


There are no tax implications for using a debt management program. However, if you use a debt settlement company, you will be required to pay taxes on the amount of money you “saved” as a result of their efforts.

Think of it this way: If the debt settlement company was able to convince your creditor to settle for a total of $3,000, on that $9,000 in debt you had, the IRS would require that you pay taxes on the $6,000 you “saved.” If you fall into the 25% tax bracket, as a significant number of Americans do, that translates into $1,500. The IRS views the $6,000 you “saved” as “earned income.”

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Is Credit Counseling For You?

If you’re considering reaching out to a credit counselor, start by asking yourself if you relate to any of the following points.

  • Do you feel overwhelmed financially?
  • Do you feel weighed down by the amount of debt you have?
  • Do you want a face-to-face with someone who can offer real advice, not just platitudes?
  • Are you uncertain about how to reach out to creditors to discuss a payment plan that might help your situation?
  • Are you unclear of what your next steps should be?

If you answered yes to any of the above, chances are you might benefit from the help and guidance of a qualified credit counseling professional.

If you started out at the top of this article wondering what is consumer credit or what does a credit counselor do, we hope we’ve been able to give you clear answers and information.

In short, a reputable credit counselor can help you get out of debt, preserve your credit rating, and help you increase your overall financial literacy – and all at relatively low/no cost. There’s an additional benefit to using a well-respected credit counseling service –  many have preexisting relationships and agreements already in place with many of the most common creditors (think big box stores and credit card vendors) to get you the financial relief you need.

Everyone wonders how does credit counseling work at one time or another. By understanding consumer credit counseling and the role of credit counselors, you can put yourself in the best position for a strong financial future.

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