Credit counseling involves instructing and educating individuals on how they can avoid taking on excessive debt that that they are not financially prepared to repay. Trained professional credit counselors, who are usually certified, work independently or for credit counseling organizations to assist people in paying off credit cards and other debt. Credit counselors teach people financial fundamentals as well as how to properly budget and manage their money.
Function
Most credit counseling services involve certified counselors who help people negotiate with their creditors to create a debt management plan (DMP) designed to eliminate their debts. Generally, DMPs are formulated to help individuals repay their obligations in a reasonable time period. Most plans consist of lowering the monthly payments in order to make the overall debts easier to manage for individual debtors. Often the interest rate and other fees are also reduced. Usually the debtor sends a check or transfers the funds electronically to the credit counselor, who then makes payment to the creditors. Many credit counseling agencies receive fees from lenders or credit card companies.
Who Can Benefit
Individuals who are current on their accounts and can pay their obligations usually do not need credit counseling services. In fact, they may be able to approach creditors and negotiate lower interest rates or fees. Typically, consumers who need credit counseling experience one or several of the following issues: 1) inability to pay the monthly minimum on credit cards; 2) receiving constant calls from creditors and collection companies; or 3) routinely late in paying one or more bills. In some case, credit counseling is not a viable option for individuals who have a substantial amount of debt that would take more than five years to pay off.
Counseling Sessions
Individuals work one-on-one with credit counselors. They usually are required to submit information regarding their income, liabilities and debts. Many credit counseling classes are geared toward introducing people to educational information on a website, or financial management classes near their location. Some may go as far as to recommend counseling to people who may be experiencing personal problems that may be a source of more debt. The credit counselor evaluates the data and helps people fashion a realistic and workable debt management plan based on the information provided by clients and their particular needs.
Effect on Credit
The effect of credit counseling on your credit depends on the creditor and how the creditor reports the information to the credit agency. Some creditors may report you as late or delinquent until a specified numbers of payments are made according to the negotiated agreement. Others may only add a note to the account. Certain lenders may even look favorably upon borrowers who have completed credit counseling.
Warning
There are many unscrupulous companies taking advantage of unwitting consumers who are seeking credit counseling services. Avoid firms that request large fees to be paid upfront. Be careful of companies that make unrealistic promises. In addition, know where your payments are going and how much of your money is going to the agency.
You should seek out firms that are accredited by organizations, such as the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA).
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