Credit counseling vs. credit repair

Credit counseling and credit repair can sound alike, but they’re different services that focus on different things. Here’s how the CFPB and FTC describe each one, and what they suggest checking before you work with a credit counselor.

What credit counseling is

The CFPB says credit counseling organizations advise people on managing money and debt. They’re usually nonprofits. Counselors typically have training in credit, debt management and budgeting, and they review your finances to help you build a plan.

According to the CFPB, a credit counselor may:

Give advice on managing your money and debts.
Help you build a budget.
Help you get your credit report and scores.
Offer free educational materials and workshops.
Set up a debt management plan.

Credit counselors can’t erase your debts, and they may charge fees. The CFPB notes that credit counseling focuses on budgeting and lowering your monthly payment, not on cutting the total amount you owe.

How a debt management plan works

With a debt management plan, you make one monthly payment to the counseling organization, and it pays your creditors. The FTC explains that creditors may lower interest rates or waive certain fees. A few more points from the FTC:

Plans cover unsecured debts like credit cards, student loans and medical bills, but not secured debts like mortgages or car loans.
A plan requires regular, on-time payments and can take 48 months or more.
You may have to avoid applying for or using new credit until the plan ends.
Plans don’t help everyone. Before you send any payments, confirm with each creditor that it has accepted the plan.

What credit repair is

The CFPB describes credit repair companies as for-profit businesses that say they’ll fix your credit, usually by disputing negative items on your credit reports. It notes that you can often do this yourself for free.

The CFPB also says credit repair companies can’t legally get information taken off your report if it’s accurate and timely. Accurate negative information generally ages off over time. See how long negative information stays for the time limits and exceptions.

How federal law treats each one

The Credit Repair Organizations Act covers anyone who sells, for payment, a service aimed at improving a consumer’s credit record, history or rating. Its definition excludes nonprofit organizations that are tax-exempt under section 501(c)(3) of the tax code, along with banks, credit unions, and creditors helping you restructure a debt you owe them. You can read about your rights under the Credit Repair Organizations Act.

How to choose a credit counselor

Where to look

The FTC lists credit unions, universities, U.S. Cooperative Extension Service branches and military personal financial managers as places that may offer counseling. Extension offices are listed at extension.org.
The U.S. Trustee Program at justice.gov/ust lists organizations approved to provide pre-bankruptcy counseling. The FTC notes that it doesn’t endorse any organization on the list.
Check any organization with your state attorney general and your local consumer protection agency. Having no complaints doesn’t by itself mean an organization is legitimate.

The FTC also warns that nonprofit status doesn’t mean services are free, affordable or legitimate. Some nonprofits charge high fees that they don’t always disclose.

Questions to ask

The CFPB and FTC suggest questions like these:

What services do you offer, and do they go beyond a debt management plan?
How is counseling delivered (in person, by phone or online), and how long is the first session?
Are educational materials free?
What are the setup and monthly fees? Can I get a written price quote?
Can I still get help if I can’t afford the fees?
What qualifications do your counselors have, and who issued them?
How are employees paid? Does their pay depend on enrolling me in services or on payments I make?
Does my state require a license for this work, and do you have one?

Get every detail and promise in writing, and read any contract before you sign it.

Red flags

The organization won’t send free information about its services unless you first share details about your situation.
It charges a lot before doing anything, or promises to fix all your problems.
It pushes a debt management plan before reviewing your finances, or says a plan is your only option.
It charges for educational materials, or won’t help if you can’t pay.

The CFPB notes that the FTC has found some debt management plan providers have defrauded people. If you run into problems, you can report them at ReportFraud.ftc.gov, to your state attorney general, or to the CFPB at (855) 411-2372. For signs of trouble on the credit repair side, see credit repair scam warning signs.

The short version

Credit counseling focuses on budgeting and managing debt. Organizations are usually nonprofits and may offer a debt management plan.
Credit repair companies are for-profit and usually dispute items on your reports, which you can often do yourself for free.
No one can legally get accurate, timely information taken off your credit report.
Nonprofit status alone doesn’t mean a counselor is affordable or legitimate. Check with your state attorney general and local consumer protection agency.
Ask about fees, services and staff pay, and get everything in writing.

Sources

General information, not legal or financial advice. Laws and government guidance change, so check the sources above for the latest.

Credit counseling vs. credit repair, and how to choose a counselor