I'm a personal finance blogger and have been working with a non-profit credit counseling agency for quite some time and the most common thing that the credit counselors run into here at the credit counseling agency are consumers having no idea what credit counseling is and not knowing the difference between credit counseling and debt settlement.

Credit Counseling: A Little History

Back in the 1950's a group of creditors got together and formed the NFCC (National Foundation of Credit Counselors), that's when the first credit counseling organizations were formed, and at one time there were over 1000 credit counseling organizations in the US, today there are more like 300 active credit counseling organizations.

Basically the NFCC was set up to spread financial literacy and educate the American consumer on things like how to set up a budget and how to rid oneself of debt. Over the course of the past 60 years there has been several credit counseling organizations that have formed, and there are many credit counseling organizations that certifiy financial professionals on credit counseling matters.

Credit Counseling Basics

Credit counseling (or debt counseling as it's known in the UK) at it's core is basically educating consumers in regards to budgeting and credit card debt. A good non-profit, credit counseling agency will first focus on providing the consumer with tools and educational resources that will help an individual manage their budget and credit card debt more effectively.

If the credit counselor uncovers that the consumer may benefit from engaging in a more custom debt elimination plan then the credit counseling may have to enroll the consumer into a DMP (Debt management Plan). A DMP is for consumers whose credit card debt has become unmanageable, and whose debt has become out of control. Once the DMP is in place a credit counselor can step up to bat for a debtor and negotiate with his creditors for lower interest rates, to waive fees and to set the creditor straight on the debtor's intentions in getting the debt paid off as soon as possible.

In most cases, once a debtor is enrolled in a DMP, in lieu of making payments to their creditors they begin making payments to the credit counseling agency, and the service department begins allots the funds among their creditors. With most non-profit credit counseling agencies there is a suggested donation of around $50 a month that is automatically withdrawn along with their payments to the creditors, it's never more than $75, depending on the state but most non-profit credit counseling don't ask or accept more than a $75 donation every month while in the DMP.

A typical debt management program lasts anywhere between 3 or 5 years, and the consumer can reasonably expect to be debt free at the end of the program. There is a debate in regards to enrolling in credit counseling and if it has an adverse effect on your credit rating, in regards to this matter FICO has stated several times that credit counseling does not have an adverse effect on your credit score but one thing that a consumer has to keep in mind is that if your enrolled in a credit counseling program, it will say that on your credit report, and that may keep a creditor from extending your credit. If you're in the market for a home, and you are currently enrolled in a credit counseling program you may run into some problems getting approved because a lender could perceive your enrollment in a credit counseling program as a credit risk.

The primary objective of most credit counseling agencies is to educate consumers; enrolling individual consumers in a DMP is not the primary objective and is really only used in worst case scenarios where the debtors credit is just out of control. If you're thinking of enrolling in credit counseling, make sure that the credit counselor sets you up with a through budget analysis to uncover any problem areas with your spending that you may have.

Debt Settlement vs Credit Counseling

The debt repair industry is one of the most competitive and over-saturated industries in the market today. Unfortunately there are a lot of fly-by night organizations and misinformation out there. To confuse the consumer even more there is also a lot of debt settlement organization companies that are advertising themselves as credit counseling, but in fact once you call it becomes very apparent that these organizations have no intentions on "counseling" you and are more concerned with settling your debt and receiving massive up-front fees.

Debt settlement is a little scary, and could have been an unnecessary process if you spoke with a credit counseling organization first. Debt settlement basically is a process where a debtor stops making payments to their creditors, and in lieu of making monthly payments to your creditors you begin making payments to your debt settlement organization, the debt settlement organization then begins stockpiling your monthly payments with the intent of settling your debts with your creditors.

Here's the deal with the debt settlement, by stopping all payments to your creditors your are making yourself vulnerable, and you could possibly get sued by your creditors. Due to the fact that you're stopping payments towards your financial obligations some legal experts argue that you could be criminally liable and prosecuted because you're essentially not paying your financial obligations.

If you're in trouble with your creditors you are familiar with the phone calls, to the point that the ringing phone becomes your worst enemy. With debt settlement, you're basically not paying your creditors, so guess what? You are probably going to get twice as many calls than you were receiving previously. So if calling creditors is the bane of your existence than you are going to want to look at other credit repair alternatives.

Another huge difference between credit counseling and debt settlement is the impact that debt settlement has on your credit report. If you stop making payments to your creditors, your creditors have no choice but to report that to the credit reporting agencies and you better believe that it's going to show up on your credit report. Even if your debt settlement goes through and the debt settlement organization was able to successfully settle your debts, your credit report will show that your debt's were "settled", that's generally viewed as a negative mark on your credit report.

Every consumer's challenge is uniqe so the best thing to do is go to friends and family, or your own personal network first if you're experiencing financial hardship and ask for referrals and recommendations. Especially if you have a mass amount of credit card debt it would be wise to check out your credit car debt by looking at what kind of of payments you're going to need to make by entering your balance into a credit card payoff calculator that way you will have a plan on how to get your credit cards paid off. Your family or friends are of no help, or they're just giving you general personal finance advice your best next step would be to speak with a credit counselor. It's basically free advise, and if you're lucky enough you can get set up with solid budget advice that could go a long way.