Editor's note: This article appeared originally at Debt-Proof Living on March 1st 2012. 

If there’s one thing that makes many people go hmmmm, it’s the topic of credit counseling. Many people still confuse credit counseling, which is designed to pay back all of what a borrower owes, with debt settlement, which is designed to negotiate payoffs of 50 percent or less of what the borrower owes. Others assume incorrectly that credit counseling is the same as debt consolidation.

Credit counseling is simply a process that involves offering education to consumers about how to avoid incurring debts that cannot be repaid through establishing an effective Debt Management Plan (DMP) and budget. Credit counselors are often able to negotiate lower interest rates and a more favorable payback schedule.

Here’s when a credit counselor’s debt-management program may help you:

Your unsecured debt is mostly on credit cards. Debt-management plans typically can’t deal directly with overwhelming medical bills, student loans or other similar debts, although a credit counselor may offer advice and education about budgeting and money management that could help you cope with these bills.

You are ready to get on a strict budget. A debt-management plan requires you to turn over a certain dollar amount each month to the credit counselor, who distributes the money to your creditors. You usually have to trim your spending fairly deeply to come up with the cash.

You are determined to avoid bankruptcy. Credit counseling is designed to help you avoid bankruptcy or debt settlement.

You’re not already in too deep. The problem with this form of help is that people wait too long to seek aid. If you have enough income to pay the minimums on your bills and a little bit extra, you’ll have the best shot at success with credit counseling. Otherwise, bankruptcy or debt settlement may be better options.

DPL recommends NFCC

For most of credit counseling’s history, the industry has been dominated by the National Foundation for Credit Counseling (NFCC), whose nonprofit affiliates known mostly as Consumer Credit Counseling Services offer lower interest rates and payment plans for people who have fallen behind.

NFCC, offering credit counseling and financial rehabilitation since 1951, has become the gold standard in credit counseling. It is the only counseling organization DPL recommends to those who need this level of help.

What NFCC does

Each year, around three million people receive counseling and educational services from NFCC member agencies. Over one-third of all consumers who come to an NFCC agency for counseling are able to manage their debt on their own after receiving financial education and counseling.

NFCC’s success rate

Recently I spoke with Gail Cunningham of NFCC and asked her about NFCC’s success rate.

“In 2011, of the 2.5 million people NFCC counseled, one-third required only a number of counseling sessions to get them back on track,” says Gail. “Another one-third of that group required professional intervention by means of our debt-management program.”

The final one-third were found to be better served by someone else. These are cases that involve physical abuse, emotional issues, gambling and so forth, for which NFCC is not qualified or prepared to deal with. For this group, NFCC referred them to other social service agencies or to bankruptcy attorneys.

When pressed for a number, Gail responded that about 53 percent of those who come to NFCC seeking help go on to a successful completion, which means:  Unsecured debt is 100 percent paid off, they’re back on their financial feet and confident that they will be able to manage successfully their finances on a budget in the future.

Effect on credit rating

What happens to your credit during counseling largely depends on how your lenders report your account to the credit bureaus. Some creditors report customers as delinquent on their bills until they make three consecutive payments of the new minimums negotiated by their credit services.

Being reported as late or delinquent can certainly hurt your credit scores, but a simple notation about credit counseling probably won't.

How to find

To be connected with a credit counselor that is certified by NFCC, go to NFCC.org and look for “Click Here to Begin.” Or call 800 388-2227 to be connected to the counselor closest to you.

© 2012 Debt-Proof Living. All rights reserved. Used with permission.

"Debt-Proof Living" was founded in 1992 by Mary Hunt.  What began as a newsletter to encourage and empower people to break free from the bondage of consumer debt has grown into a huge community of ordinary people who have achieved remarkable success in their quest to effectively manage their money and stay out of debt.  Today, "The Cheapskate Monthly" is read by close to 100,000 Cheapskates.  Click here to subscribe.

Publication date: July 13, 2012