Credit counseling, like each debt relief option, has both advantages and disadvantages that must be carefully considered prior to enrolling in a debt management plan (DMP). The purpose of this article is to articulate the nature of credit counseling and some of its common criticisms in order to help consumers decipher how it fits into their financial picture.

Credit counseling has evolved dramatically in the last two decades, but the underlying premise has always been the same: clients make one monthly payment to the debt counseling agency, who in turn distributes payments to the credit card companies. By using a credit counseling agency, consumers can lower their interest rates and reduce the time frame for becoming debt free. The monthly payment is normally lower than your combined minimum payments and the overall savings can be large because of the interest rate reduction. The average program lasts 4 to 5 years, and credit counselors can also help you assess your financial picture to determine what problem if any exists with your budgeting, spending, or debt load.

Many credit counseling agencies are non-profit organizations, and the largest portion of the compensation that credit counseling agencies receive comes from the credit card companies themselves. This compensation, known as “Fair Share”, at one time was as high as 15 percent of the monthly payment, but in recent years it has decreased to 4 to 10 percent on average. In addition to this compensation, consumers oftentimes pay a set up fee, as well as monthly maintenance fees for the services. Some of the more credible non-profit entities will waive these initial and monthly fees if you show a genuine inability to afford them.

Follow this link to learn about the first major disadvantage of credit counseling.