Credit counseling

Credit counseling (known in the United Kingdom as Debt counselling) is commonly a process that is used to help individual debtors with debt settlement through education, budgeting and the use of a variety of tools with the goal to reduce and ultimately eliminate debt.[1] Credit counseling is most often done by Credit counseling agencies that are empowered by contract to act on behalf of the debtor to negotiate with creditors to resolve debt that is beyond a debtor's ability to pay. Some of the agencies are non-profits that charge at no or non-fee rates, while others can be for-profit and include high fees. Regulations on credit counseling and Credit counseling agencies varies by country and sometimes within regions of the countries themselves.[1] In the United States, individuals filing Chapter 13 bankruptcy are required to receive counseling.


In the United States, the National Foundation for Credit Counseling was established in 1951. The modern practice known as ‘‘credit counseling’’ was initiated by creditor banks and credit card companies during the mid-1960s to address the growing volume of personal bankruptcies.[2]

Although there is variation from country to country and even in regions within country, consumer debt is primarily made up of home loans, credit card debt and car loans.[3] Credit counseling includes an array of services to address consumer debt that is not within the debtor's ability to pay. In addition to education, a popular credit counseling option is the ‘‘Debt management plan’’ (‘‘DMP’’, known in the United Kingdom as the Individual voluntary arrangement or "IVA"). In order to initiate a DMP, a consumer would authorize the credit counselor to contact each of the consumer’s unsecured creditors and negotiate with each creditor to lower the consumer’s monthly payment amount, to lower the interest rate, and to waive any outstanding late fees. The debt was then ‘‘consolidated’’ into a single payment.[1]

Credit counselors can sometimes negotiate debt relief, where part or whole of an individual debt is forgiven. Another option is Debt consolidation, in which one new loan replaces multiple unsecured credit debts. The Debt-snowball method is a budgeting approach that addresses debt systematically.


Global criticism of credit counseling comes primarily from predatory practices that take advantage of debtors that are already struggling.[4] These practices include failing to meet required standards, charging unlawful or unreasonable fees, failing to provide affordable solutions for consumers, and neglecting to make customers aware of free debt services available elsewhere.[5]

Regulations by country

United States

In the United States, Credit counseling agencies are loosely regulated by the Federal Trade Commission (FTC), the nation’s consumer protection agency, which can sue companies that have deceived consumers about the cost, nature, or benefits of their services.[1] Different states may regulate DMPs individually and Attorneys General are empowered to protect state citizens from fraud.[4] Two professional associations represent Credit counselors: the National Foundation for Credit Counseling and the Association of Independent Consumer Credit Counseling Agencies.

United Kingdom

In the United Kingdom, the Financial Conduct Authority is responsible for the regulation of consumer credit and has established a Debt Management Plan Protocol. It can impose fines for improper conduct.[5]

European Union

Elsewhere in the European Union, regulation and non-regulation of Credit counseling agencies and their approaches, including DMPs, are widely varied. In Sweden, guidelines for credit counseling are loosely provided by the Swedish Confederation of Professional Employees (TCO) and creditors are encouraged to use them in lieu of the court system. In Ireland, the Irish Congress of Trade Unions (ICTU) provides debt resolution information directly to debtors. In Latvia, a debt advisory company called LAKRA works with employers to assist indebted employees.[6]


The Financial Consumer Agency of Canada (FCAC)[7] advises Canadians to do their homework about credit counseling services before entering into an agreement. According to the Agency, consumers should shop around and compare services of credit counseling bodies and take note of the different fee structures of for-profit and not-for-profit credit counseling, as well as what services are offered for those fees. Consumers considering entering into a DMP should also be aware that an R7 credit rating will be entered in their credit report and that their credit report will show that they used credit counseling, a notation that will remain on the report for at least two to three years after completion of the counseling program. Prospective lenders, employers and landlords may view information in an individual's credit report, if the application forms consumers sign grant them permission to do so.

South Africa

The National Credit Regulator (NCR) was established as the regulator under the National Credit Act No. 34 of 2005 (The Act) and is responsible for the regulation of the South African credit industry. It is tasked with carrying out education, research, policy development, registration of industry participants, investigation of complaints, and ensuring the enforcement of the Act. The NCR is also tasked with the registration of credit providers, credit bureau and debt counsellors; and with the enforcement of compliance with the Act. Debt Counselling was introduced and enforced in 2007. This enabled over-indebted consumers to seek relief in accordance to the National Credit Act.


  1. 1 2 3 4 FTC (Federal Trade Commission). "For People on Debt Management Plans: A Must-Do List" (PDF). FTC.GOV. Federal Trade Commission (United States Government). Retrieved 30 December 2014.
  2. United States Senate (April 13, 2005). ""PROFITEERING IN A NON-PROFIT INDUSTRY: ABUSIVE PRACTICES IN CREDIT COUNSELING" a report by the Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs United States Senate." (PDF). United States Government. Retrieved 30 December 2014.
  3. Albert-Deitch, Cameron (November 18, 2014). "Hey Big Spenders, Where the Biggest Debtors in America Call Home (Interactive)". INC. Interactive by Retrieved 21 December 2014.
  5. 1 2 Evans, Judith (December 18, 2014). "UK debt management company Harrington Brooks to pay compensation". FT.COM Financials. Retrieved 30 December 2014.
  6. DuBois, Hans (August 11, 2011). "Household debt advisory services in the European Union" (PDF). EUROFOUND. Retrieved 30 December 2014.
  7. Consumer Alert about American Debt Settlement companies in Canada

External links

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