9 Questions to Ask a Credit Counselor Before You Enroll
The pitch from a “non-profit” credit counselor can seem enticing at first glance. What they usually leave out is that credit counselors get paid by your creditors when you sign up, you’re unlikely to actually complete the program, and the total cost of the program will be higher than other options.
Before you enroll, get four things in writing:
Total cost of the plan — principal, interest, and fees over the full term
Program completion rate
Impact on your credit score
How the credit counselor gets paid
Most credit counselors won’t volunteer these answers, and most consumers don’t know to ask. The nine questions below will get you the information you need to determine the best options for paying back your debt.
1. How does your organization make money?
Most people assume donations or government grants fund nonprofit credit counselors. In reality, the primary revenue source for credit counseling agencies is a payment from your creditors called a fair-share contribution. When you enroll in a Debt Management Plan, the agency collects your monthly payment and forwards it to your creditors. The creditors then return a percentage back to the agency, contributions that can make up a massive portion of their operating revenue.
A 2003 study presented at the Federal Reserve Bank of Chicago found that 72% of NFCC agency revenue came from these creditor payments. Another 18% came from fees charged to consumers. Most of a counselor’s revenue comes from the debt management plan.
The Consumer Federation of America flagged this problem more than two decades ago, noting that fair-share revenue had made agencies structurally dependent on debt management plan enrollment.
If you’re told “We’re a nonprofit,” or that your consultation is free, that is a cue to press harder. Although the consultation may be free, the agency’s primary source of income depends on enrolling you, which creates pressure on counselors to close the deal.
2. Will you walk me through all of my options (not just a debt management plan)?
A credible counselor should be able to sit down with you and, on paper, compare:
Total cost of a debt management plan(principal + interest + fees over 48-60 months)
Total cost of debt settlement (reduced principal + settlement company fee)
Total cost of a consolidation loan (if you qualify)
Total cost of minimum payments on your current terms
Consequences and costs of bankruptcy
They should compare completion rates, credit score impact, and timeline for each. They should disclose who pays them and how. And they should let you take the comparison home and think about it.
A true fiduciary would welcome the comparison. An organization with a financial incentive to steer you toward one product might not.
3. What will this debt management plan cost me in total, not just per month?
When you add up total principal, total interest, and total fees, a debt management plan is often the most expensive option for repaying debt. Someone with $25,000 in credit card debt might pay roughly $5,500 in interest (at 8% over 60 months) and $1,800 in fees, for a total of $32,300 — 129% of the original balance.
The monthly fees for a debt management plan might sound modest. You’re typically looking at a setup fee of up to $75 and a recurring fee of $25 to $50 per month, according to the NFCC itself. But a debt management plan typically runs 48 to 60 months. Over five years, those fees alone can add up to $1,500-$3,000 or more, depending on the agency and your state.
That's on top of the debt itself. Unlike a negotiated settlement, where the principal balance is reduced, a debt management plan requires you to repay 100% of your principal, plus interest at a reduced rate.
Ask for the number in writing before you enroll: total principal, total interest, total fees, total months. Then compare it to what you'd pay under other options.
4. How do you determine my interest rate and monthly payment for a DMP?
Credit counselors don't negotiate a custom rate for each consumer. Each creditor has preset, non-negotiable guidelines, and counselors match you to the highest monthly payment you can afford.
Higher payments mean more money flowing to creditors, which means more revenue back to the agency. A 2005 analysis by the Philadelphia Federal Reserve detailed how creditors were tying fair-share payments to performance metrics that reward agencies for bringing in higher, more consistent consumer payments.
Ask whether your rate was negotiated specifically for you or assigned by default. Ask how the counselor decided what you can afford, and whether a lower payment with a longer term was considered.
5. How will a debt management plan affect my credit score?
Many consumers mistakenly believe credit counseling protects their credit score. The NFCC's own research, conducted in partnership with Ohio State University, shows otherwise.
The study found that counseled clients experienced “a steep drop of about 13 points” in their credit scores between the pre-counseling quarter and the first post-counseling quarter, along with a spike in payment delinquencies. Recovery took about a year, and even then, counseled clients' scores were still lower than the comparison group six quarters later.
Ask your counselor, directly: Will entering this program lower my credit score? If they deflect, ask them to explain the findings in the Ohio State study, which their own trade association funded.
6. What percentage of people who start this program actually finish it?
The completion rates for debt management plan are so bad that the industry has largely stopped publishing new data.
A 1999 internal NFCC survey cited by Consumer Reports and later by the Consumer Federation of America found that just 21% of debt management plan clients completed the program. The NFCC later reported a figure of about 26%. Roughly half of enrollees dropped out entirely or filed for bankruptcy.
Since then, the NFCC has not published comprehensive completion data. If your counselor can't cite a current completion rate supported by published research, that silence suggests the numbers haven't improved enough to be made public.
7. What happens if I can't keep up with payments and drop out?
On a debt management plan, you don't get partial credit for partial completion. If you drop out three years into a five-year plan, the fees you've paid are gone. Your accounts may have already been closed. You will be paying down your debt at the full principal, just with a lower interest.
Ask your counselor what you walk away with if the plan doesn't work out. If the answer is “nothing,” weigh that carefully against the completion statistics.
8. Who funds your organization, and who sits on your board?
The National Foundation for Credit Counseling is the largest trade group for nonprofit credit counseling. It was founded in 1951… by major credit card issuers. As the Federal Reserve Bank of Minneapolis documented, card issuers established the earliest independent, nonprofit counseling agencies “as a means of reducing the number of defaults among their cardholders.”
That relationship hasn't faded. Today, the NFCC's Board of Trustees includes senior executives from Citibank, Wells Fargo, Capital One, JPMorgan Chase, and Synchrony. These are very likely the same banks that issue the credit cards you're trying to pay off.
Ask your counselor whether any creditors sit on their parent organization's board. Ask whether any of your creditors have a financial relationship with the agency. You have a right to know whether the person advising you answers, even indirectly, to the people you owe money to.
9. Are you required to disclose your financial relationship with my creditors?
The answer is no. There is no federal requirement for credit counseling agencies to disclose fair-share arrangements to consumers. There is no requirement to tell you that the agency earns a percentage of every payment you make. There is no requirement to tell you that your creditors sit on the board of the trade association your counselor belongs to.
The U.S. Senate investigated this problem in 2004. The Permanent Subcommittee on Investigations published a staff report titled "Profiteering in a Non-Profit Industry." The IRS subsequently revoked the tax-exempt status of multiple agencies, with the IRS Commissioner stating that these companies had “poisoned an entire sector of the charitable community.” The IRS found that 41% of the revenue in the identified credit counseling industry came from organizations that had their status revoked or faced proposed revocations.
That crackdown was 20 years ago. The structural incentives it exposed are still very much alive today. So before you enroll in a debt management plan, make sure you have clear answers to all of the above and carefully weigh your options to find the one best for you.