Credit counseling vs. debt relief: Which is better for borrowers?

It's easy to find yourself drowning in debt. With today's interest rates and increasingly rising prices, the pressure to charge purchases and borrow money is strong. Unfortunately, that debt can pose real problems — particularly if you can't stay up-to-date on your payments. 

If that's something you're dealing with, enlisting a credit counselor or debt relief provider could help. Below, we'll explain how those options compare and when you might choose one over the other.

Need help? Chat with a debt relief expert about your options today.

Why credit counseling may be better for borrowers

Credit counseling is a professional service that can help you get your finances on track. 

"They can assist with budgeting, debt management plans, financial education, personalized advice, and avoiding bankruptcy," says Tayri Martinez-Orza, a performance and quality assurance specialist at GreenPath Financial Wellness. 

Generally speaking, credit counseling agencies are non-profit organizations. They may offer free services (like debt analysis, for example) and debt management plans, which streamline your repayments and lower your interest rates, for a small monthly fee. GreenPath, for instance, charges an average of $28 per month for its debt management plans (DMPs), Martinez-Orza says. 

Credit counseling tends to be a good option if "someone is overwhelmed with debt, has high credit card balances, is facing financial stress, or simply wants a second set of eyes to take a look at their financial situation," Martinez-Orza says.

Credit counseling may also be the better option if you want to get to the root of your debt issue — and, more importantly, prevent debt from accumulating again.

"A good credit counselor will look beyond the 'what' of the debt to address the 'why,'" says Lisa Whitley, a financial coach and planner at Financial Coach & Planner at Money By Lisa. "You should expect a credit counselor to help you develop a budget that includes realistic debt repayment, suggest which debts should be prioritized in the payoff plan, and, if appropriate, identify options to reduce the cost of the debt through debt consolidation."

Learn more about the debt relief solutions available to you.

Why debt relief may be better for borrowers

Debt relief companies also offer several services. Debt settlement, which allows you to pay off your debts for less than you owe, and debt consolidation, which rolls all your debts into one single loan payment, are two of the most common.

Debt consolidation is something you can technically do on your own by getting a low-interest loan and then using it to pay off your higher-interest debts, but if debt settlement is something you're seeking, a debt relief company could be a good option. 

"Debt settlement companies collect a set amount of money each month and usually only negotiate with creditors once they have enough to make a settlement offer," Martinez-Orza says. "This can be beneficial for those who lack the funds upfront or struggle with saving consistently."

With debt settlement, the goal is to have you pay less than you originally owed — while wiping your balances clean at the same time.

"The company acts as your representative, communicating with your creditors and working on your behalf to reach settlements that significantly lower your debt obligations," says Natalia Brown, chief compliance and consumer affairs officer for National Debt Relief. "By successfully negotiating settlements, you may pay substantially less than the original amount you owed."

According to a study by the American Association of Debt Resolution, the average consumer enrolled in a debt settlement program saw about a 32% reduction of their total enrolled debts.

How to decide between credit counseling and debt relief 

Credit counseling and debt relief aren't necessarily two separate options — though they are offered by two different types of companies. Credit counseling is typically offered by non-profit organizations, while debt relief is generally offered by a debt relief company. In some cases, though, utilizing both types of services may be smart. 

"Debt relief is not an alternative to credit counseling, but rather a specific set of tools that a credit counselor might suggest as part of a broader financial plan," Whitley says.

If you're trying to decide between one or the other, it may come down to how big your debts are. With smaller balances, you may be able to tackle the issue with credit counseling and consolidating or even settling debts yourself. With bigger debts, having a debt relief professional work with creditors for you may be the better option. 

Just be aware: Debt relief services don't come for free. The company will charge a fee, which is typically a portion of the negotiated debt, to cover the cost of its services. Your credit could also take a hit with debt relief, as you're often required to stop making payments on your debts while the debt relief company negotiates a deal.

"If you plan to make a major purchase soon or need a strong credit score for any reason, avoiding debt settlement may be wise, as it can negatively impact your credit," Martinez-Orza says.

There also may be tax implications if any of your debts are settled for less than you owe, so make sure you're prepared. This is because the IRS considers forgiven debt taxable income, which could increase your tax bill come next April.

"Credit counseling and debt relief through debt settlement both help individuals manage debt, but the best option depends on each person's unique circumstances," Brown says. "For anyone considering debt settlement, it is important to seek guidance from a reputable company to ensure you are making informed decisions and protecting your financial well-being."