What is Credit Counseling?

The credit counseling process involves experts guiding consumers who are in debt out of debt, and educates them on how to stay out of it. But more than just educating consumers, credit counseling often involves negotiating with creditors to establish a debt management plan for a client to follow, tailored to them and their situation.

The plan the counselor establishes - properly followed by the debtor - may help the consumer repay his or her debt by working out a repayment plan with the creditor that includes reduced payments. They also typically eliminate late fees and lower interest rates on balances. These plans also typically adhere to guidelines established with the input of and by prearrangement with credit card companies.

At one time, there were over 1000 active credit counseling agencies. Today, there are less than 300 active organizations in the United States. The first credit counseling agencies were created in 1951 in the United States when credit grantors created The National Foundation for Credit Counseling, or NFCC. According to W. Patrick Boisclair, Chairman of the NFCC's Board of Trustees, "the NFCC initially monitored legislative and regulatory activity for its retail credit members" and "also conducted public awareness campaigns on credit."

Their stated objective was to promote financial literacy and help consumers avoid bankruptcy, but they did not serve as collection agencies for the creditors. The first local credit counseling franchises emerged in the 1960s and offered education and counseling directly to consumers.

In 1993, the “Association of Independent Consumer Credit Counseling Agencies,” or AICCCA, was founded, citing a need for “industry-wide standards of excellence and ethical conduct.” This formally organized the NFCC’s competition. The AICCCA was formed from the group of counselors who favored telephone delivery of debt management programs.

The NFCC was, in the beginning, strongly opposed to this telephone business model, primarily favoring face-to-face counseling as a more effective solution. Eventually, all organizations practiced both phone and face-to-face processes with some agencies using large inbound call centers driven by mass media advertising.

Not all credit counseling agencies belong to a trade organization, nor are they required to do so.

For those facing a mountain of debt that is crushing them and their potential for a healthy financial future, credit counseling can be a real godsend. But there is a drawback, and that is that agreements arranged by credit counselors on behalf of consumers will most likely prevent that consumer from using credit cards or from applying for more credit cards.

But in the end, since credit was in all likelihood mismanaged by the consumers in question, it isn't a matter of restriction, but for the consumer's own protection.