Credit Counseling
>> Friday, July 8, 2011
Credit counseling (known in the United Kingdom as debt counseling) is a process that involves offering education to consumers about how to avoid incurring debts that cannot be repaid through establishing an effective Debt Management Plan and Budget. Credit counseling is usually less typified by functions of credit education or the psychology of spending habits, rather credit counseling establishes a planned method of debt relief, typically through a Debt Management Plan.Credit counseling often involves negotiating with creditors to establish a debt management plan (DMP) for a consumer. A DMP may help the debtor repay his or her debt by working out a repayment plan with the creditor. DMPs, set up by credit counselors, usually offer reduced payments, fees and interest rates to the client. Credit counselors refer to the terms dictated by the creditors to determine payments or interest reductions offered to consumers in a debt management plan.
On the one hand, credit counseling can be a good way to resolve debt while avoiding bankruptcy. Consumer credit counseling service companies organize themselves as either for-profit or not-for-profit. Recently, not-for-profit Credit Counseling in America has been in the media and under the spotlight of the Internal Revenue Service ("IRS"). Forty-one credit counseling companies had their tax exempt (not-for-profit) status revoked; they found that many companies didn't offer the level of counseling or education required in order to qualify for a tax-exempt status.
What credit counseling companies do (regardless of profit status) is arrange for you to pay back your full principal balance(s) on terms that are easier for you to service such as a longer amortization term and/or a reduced interest rate. What this means is that if you owe $10,000 and you are paying an average of 15% interest on all your debts, you will still owe $10,000 but they will hopefully reduce your interest rate to at least half of your original rate and set more affordable payments usually over a longer period of time. Provided you can afford the entire plan and fees, you will be debt free at some point. Remember not-for-profit does not mean free, they still charge you a fee.
What You Need To Know Before You Sign Up
Credit counseling is reported to your credit report as a R7 and viewed negatively by every credit grantor. As a result, if you are in a 7 year repayment plan, don't count on using credit cards, getting a car loan or mortgage for the next 7 years plus the time it takes you to re-establish your credit rating.
The origin of credit counseling goes back to the 1980's when grantors got together and created it in order to recover money from people in debt. The new consumer credit counseling banner at the time was distanced from the credit grantors under a friendlier not-for-profit status which created trust and it worked well with the public. People signed up in droves and for-profit companies followed suit shortly there-after.
If you owe less then $10,000, credit counseling probably isn't a bad idea and a good alternative to bankruptcy. A new entry to the debt management marketplace has been debt settlement. Debt settlement has been a popular option in America and the movement has been gathering momentum in Canada. Unlike credit counseling, debt settlement actually reduces the principal balance owed by you to around 40%-70% of your original principal balance. A credit counseling service doesn't do that, it only freezes or reduces your interest rate.
If you owe more than you can manage, consider debt settlement as an option. It's an excellent opportunity to wipe out your debt quickly while saving you a substantial amount of money without doing the same damage to your credit rating as bankruptcy would. I have seen people with $50,000 of debt totally debt free in as little as 30 days if they have the right resources. Debt settlement companies are also an agent acting in your best interest and are not directed or managed by the very same people you owe the way that credit counseling companies are. In most cases, the fees of debt settlement companies are based on the money you save so that means they are working to save you as much as possible.
What is Credit Counseling?
When debtors are overwhelmed by their debt to the point of confusion, credit counseling can help to get back on track. Credit counseling consists of simply taking inventory of all the debt the debtor is in and formulating a feasible plan for paying the debt off. Part of the process involves negotiating with creditors to cancel late payment and other fees as well as possibly reducing interest rates.
How Does it Work?
How Do Credit Counseling Services Work?
Racking up consumer debt is not difficult to do, especially during tough economic times. You may have racked up debt without even noticing. You're hit with high interest rates that make it practically impossible to make a dent in that debt. Before you know it, you run late on a few credit car or installment loan payments and the negative marks start to accumulate on your credit report.
You may have special circumstances that forced you into debt - illness, divorce, the unexpected death of a loved one, or even unexpected home or vehicle repair expenses. The problem is that while credit card debt is piled up, interest only grows and grows. If you pay only the minimum amount required each month on any given credit card or loan, you are very unlikely to ever pay it off fully. You may start to feel so deep in the hole and discouraged about ever paying off your debt that you may consider going bankrupt. If you are looking for ways to reduce household costs or increase monthly income, consider how getting rid of your debt will affect your finances. One way to start plowing through your debt and restoring your credit rating is to undergo credit counseling.
Before working with a credit counseling service, verify that it is a reputable organization with good consumer reviews. Ask friends or family for recommendations or contact the Better Business Bureau for referrals. Be wary of any person or organization that promises to eliminate your debt without your having to ever repay it. Also be careful of anyone who asks for large sums of money upfront in order to help you work through your debt.
After you have selected a credit counseling service, you will meet with your designated credit counselor. The counselor will ask you several questions about your income, expenses and all debt. Once the credit counselor has an overall picture of your debt, income and expenses they will determine what percentage of your income can reasonably be used to pay your creditors. The credit counselor will then act as an intermediary between the debtor and his or her creditors. The counselor will negotiate with the financial lending institutions and ask them to accept a monthly payment amount that the debtor can actually afford. Once they go through this process with all of the creditors and lenders, the credit counselors will formulate a repayment plan and they will also typically close out your accounts so that more debt can't be added. Credit counseling organizations typically charge the debtor a monthly fee that they then distribute to the creditors according to the repayment plan. If a debtor stops paying the monthly fee and/or drops out of the program, the balances and interest rates tend to go back to what they were before enrolling in credit counseling.
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