Debt Relief Option #3: Credit Counseling

Credit Counseling is probably the best known, and most popular option for people seeking debt relief. It has been around for over 15 years, and is regulated in most states. Most reputable credit counseling agencies are "non-profit" in status, which consumers view as a sign of stability, and gives them confidence. Because of the regulation, credit counseling agencies are strictly limited on the amount of money they are able to charge consumers for their services, and are, in most cases, also compensated by creditors.

Once enrolled in a credit counseling program, you would be required to make a single consolidated payment directly to the counseling agency, and they distribute that payment to each of your enrolled creditors on your behalf. The average length of these programs is typically between 4-7 years.

Benefits of Credit Counseling

The primary goal and benefit of credit counseling is to get the interest rates on your credit cards reduced, which enables you to get out of debt (often times) significantly faster, and for less money, than simply making minimum payments.

Credit counseling can also be a good fit if you can afford your monthly payments just fine, but have a high number of creditors, and would prefer to make a single payment each month, rather than a payment to each of your creditors.

Risks of Credit Counseling

As with any option, it's important to find a reputable credit counseling agency before enrolling. If you enroll with a reputable company, your risks are limited. However, there are many credit counseling agencies that historically have not performed adequately for their clients, which can cause additional hardship.

If you unexpectedly need credit while in a credit counseling program, it is likely you will not be able to get it.

Downsides of Credit Counseling

While your credit score itself will usually not be negatively effected by enrolling in a credit counseling program, your ability to establish new credit, or any use of existing credit for that matter, will be abolished. Throughout the duration of the program, it is unlikely that you will be able to qualify for a home loan, car loan, or any other credit.

Although interest rates are usually (but not always) lowered for consumers in credit counseling programs, the monthly payments typically will stay the same as your minimum payments, and sometimes more. That means, for consumers that are truly struggling or unable to make their minimum monthly credit card payments, this option will not provide cash flow relief.

The dropout rate for credit counseling is 75%. (Source - "Credit Counseling in Crisis," published by Consumer Federation of America, in conjunction with NCLC.)