Credit Counselling: Meaning, Services, Benefits, and Drawbacks

If you are overwhelmed by debt or struggling with finances, credit counselling can help. It offers expert guidance to manage your money better. This support helps you make informed decisions and work towards becoming debt-free. It empowers you to regain control of your financial future.

Credit counselling is a professional service designed to help individuals reduce debt and improve financial health. Whether you're struggling to pay bills or want to improve your credit score, credit counselling provides expert, personalised guidance. It helps you create a budget and develop a plan to repay debts efficiently. 

 

Credit counsellors talk to your lenders to lower interest rates or remove fees for you. This support can provide clarity and relief as you work towards financial stability. 

Credit counselling is a structured process aimed at helping you understand and improve your financial health. Here’s how it typically works:

1. Initial Consultation

The process begins with a one-on-one meeting with a certified credit counsellor. This can be done in person, over the phone, or online. During this consultation:

• You provide details about your financial situation, including income, expenses, debts, and assets

• The counsellor may review your credit report to understand your current financial standing

• You discuss your financial challenges and goals, such as reducing debt, improving credit, or managing expenses

2. Financial Assessment

The counsellor conducts a thorough assessment of your finances. This step includes:

• Analysing your monthly budget to identify areas of overspending or inefficiency

• Categorising your debts (e.g., secured vs unsecured, high-interest loans, credit card balances)

• Identifying the root causes of financial struggles, such as unexpected expenses, lack of savings, or poor credit habits

3. Personalised Action Plan

Based on the assessment, the counsellor creates a customised financial plan tailored to your needs. This plan may include:

• Recommendations on how to allocate income, cut unnecessary expenses, and save for emergencies

• Suggestions for prioritising high-interest debts or using methods like the snowball or avalanche approach to repay debt

• Guidance on maintaining timely payments, reducing credit utilisation, and avoiding new debts

• Helping you set achievable savings and investment goals to prevent future financial crises

4. Debt Management Programme (If Applicable)

If your debt is unmanageable, the counsellor may recommend enrolling in a debt management programme (DMP). This includes:

• Negotiating with creditors to lower interest rates, waive penalties, or restructure payments

• Consolidating multiple debts into a single monthly payment monitored by the credit counselling agency

• Ensuring all payments under the DMP are made on time, helping you pay off debts in a systematic manner

5. Financial Education

An essential aspect of credit counselling is empowering you with financial knowledge. This includes:

• Teaching you how to manage money effectively through workshops or online resources

• Using budget calculators, expense trackers, and savings planners

• Providing guidance on avoiding common financial pitfalls, like overspending or missing payments

6. Ongoing Support and Monitoring

The counsellor remains in touch to monitor your progress and provide further support. This involves:

• Regular check-ins to review your financial goals and track improvements

• Adjusting the action plan if your financial circumstances change

• Offering emotional support to reduce stress and keep you motivated throughout the journey

7. Completion and Future Planning

Once your financial goals are achieved, the credit counselling process concludes with:

• A review of your progress, including debts paid off, savings built, and credit score improvements

• Recommendations for maintaining financial stability, such as building an emergency fund or planning for long-term goals like homeownership or retirement

   

Credit counselling is designed to be non-judgmental and supportive. It equips you with the tools and knowledge to manage your finances better, enabling a more secure financial future.

Credit counsellors help you manage your money, repay debts, and make informed financial decisions. Key services they provide include:

• Debt Management 

They create a debt management plan that combines all your monthly payments into one. The counsellor negotiates with lenders to reduce interest rates and remove late fees. This helps you repay debts faster and more easily.

• Student Loan Counselling 

Counsellors assist parents and students in choosing the right loan for higher education. They guide you through loan options and assist with documentation. They also help you plan a repayment schedule aligned with your financial capacity.

• Small Business Counselling 

If you run a business, a counsellor can suggest the best loan options based on your needs. Whether you need a short-term loan, equipment financing, or working capital, they assess your business. They then offer personalised funding advice.

• Homeownership Counselling

Counsellors explain the pros and cons of home loans, loans against property, and personal loans for housing. They help you understand each option clearly and select the right product. They also provide tips to save on taxes.

• Bankruptcy Counselling 

Bankruptcy should be a last resort. Counsellors help you understand its impact and explore alternatives. They guide you towards better debt solutions whenever possible.

Credit counselling does not harm your credit score. It is a guidance service designed to help you manage your finances better. However, your credit score may change depending on how you implement the advice — such as enrolling in a debt management plan, closing accounts, or adjusting your credit usage.

Choosing the right credit counselling service ensures you receive the support suited to your financial situation. Consider these tips:

• Check the services offered and confirm they match your needs

• Review fees to ensure pricing is clear and reasonable

• Research the agency’s reputation through customer reviews and ratings

• Verify counsellors’ qualifications and certification

• Look for personalised guidance tailored to your financial goals and challenges

Credit counselling offers several advantages, such as:

Debt Reduction

Credit counselling aims to reduce your debt by creating a structured and manageable repayment plan. Counsellors assess your income, expenses, and debts to prioritise which obligations to tackle first. They may recommend strategies like the snowball or avalanche method:

• Snowball Method: Smaller debts are paid off first to build momentum

• Avalanche method: Focuses on high-interest debts to save money over time

 

This systematic approach ensures that you can reduce your financial burden without compromising essential living expenses, significantly easing financial stress.

Lower Interest Rates

Credit counsellors often negotiate with creditors on your behalf to secure more favourable repayment terms. This process can lead to reduced interest rates, which lowers the overall cost of debt and makes payments more manageable. In addition, counsellors may help waive late fees, over-limit charges, and other penalties that add to your financial strain. They may also arrange for more flexible repayment schedules, allowing you to spread payments over a longer period.

Improved Credit Health

Credit counselling provides the tools and guidance needed to improve your credit health over time. Counsellors focus on helping you develop habits like paying bills on time, a key factor in credit scoring. This helps keep your credit card balances low relative to their limits. 

 

They may also ask you to avoid unnecessary debts that may be affecting your credit score. You may be further advised to raise disputes in case of errors in your credit report. Over time, these practices improve your credit score and increase your financial credibility. This enables you to access better financial products and opportunities in the future.

Personalised Advice

Every financial situation is unique, and credit counselling offers solutions tailored specifically to your needs. Counsellors consider your income, expenses, debt type, and financial goals when developing a personalised plan. This tailored approach ensures that the advice and strategies provided are achievable, making it easier for you to follow through. Whether you need help with budgeting, paying off debt, or saving for long-term goals, credit counselling makes it easy.

A credit counselling agency can simplify managing your finances and reduce stress. Benefits include:

• Helping you create a budget and a practical debt repayment plan

• Negotiating with creditors to lower interest rates and waive fees

• Guiding you to avoid bankruptcy and other severe financial actions

• Providing financial education and tools to improve money management

Some drawbacks of using a credit counselling agency include:

• Some agencies may charge high fees or have hidden costs

• Not all agencies are trustworthy or employ properly trained counsellors

• Enrolling in a debt management plan may temporarily lower your credit score, especially if it involves closing existing credit lines

• You may be encouraged to join debt management plans that do not suit your needs

The Reserve Bank of India (RBI) promotes financial literacy and credit counselling through various initiatives, particularly for underserved and rural populations. It encourages banks to set up Financial Literacy Centres (FLCs) and Customer Service Centres (CSCs) that offer free counselling services to individuals facing debt-related challenges.

 

You can also seek support through the RBI Banking Ombudsman, which addresses complaints related to unfair lending practices or mismanagement by financial institutions. These platforms offer guidance on managing debt, avoiding loan defaults, and improving your financial well-being—without any cost.

If credit counselling is not right for you, try these easy ways to manage your money better:

• Automate Your Payments

Set up automatic debits for your EMIs to ensure you never miss a due date. This helps avoid late fees and protects your credit score.

• Review Your Debt Coverage Ratio

Maintain your debt-to-income ratio below 40 per cent to keep your finances healthy. Regularly check your credit report to monitor your financial status and catch any errors early.

• Avoid Multiple Applications

Apply for credit with one lender at a time to reduce the number of hard inquiries on your report. Multiple enquiries within a short period can lower your credit score.

Credit counselling is a valuable resource for anyone struggling with debt or looking to improve their financial health. It provides personalised advice and actionable plans to help you regain control of your finances. By addressing both immediate financial challenges and long-term money habits, credit counselling can guide you toward lasting financial stability.