How Does Credit Counseling Work?

What Do Debt Counselors Do?

When a person finds themselves deeply in debt and confused about how to get out of it, they often turn to debt counseling. Counselors are trained to form a plan with the debtors to get out of debt and that includes a repayment schedule. The counselor must know how much the debt is owed. Although they work mostly with unsecured debt, knowing how much secured debt is owed is equally important to figuring out a plan. The counselors will work as a mediator between the debtor and the creditor. They will negotiate the total amount due to a lower amount and have late fees canceled. They can also negotiate interest rates. They will ask for income figures and if they determine the debtor can actually pay the debt they may not take the case. The schedules set up by the counseling agencies can take from 2 to 4 years to pay off.

How the Scheduled Plans Work

A counselor will look at the overall picture of the debt and determine what part of the income can be used to pay off the loans. These loans are usually in the form of credit cards but can include student loans, medical bills and utility bills. They negotiate with the banks to take an amount the debtor can afford each month and set up a budget for the debtor to follow. Most counseling agencies receive a monthly fee from the debtor and they pay the banks each month. They will also have the accounts closed so further debt cannot accumulate. In some cases they will recommend the debtor take a consolidation loan out to pay off the debt. This allows for all the debt to be paid by one loan with a lower interest rate, thus lower monthly payments. When a debtor sets up a monthly plan program with the counseling agency and does not pay on time or drops out, the balances and interest rates go back to what they were before they enrolled in the program. Enrolling in credit counseling does not usually change your credit score. In some cases your score be affected positively because you are now making payments on time. However, if arrangements were made to lower the balance on the card, they may report it negatively. It all depends of the policy of the bank. Even when you finish the program bad credit from credit cards and collections will stay on your credit report for 7 years. Bankruptcy is reported for 10 years. So you must weigh what is most important to you.

Why Use Credit Counseling

Credit counseling is an excellent way to get out of debt and learn budget management skills. Many counselors will even go so far as to recommend investments to better a situation after the debt is paid. If the debtor takes the counseling serious and learns how to manage money, they can come out with better credit score and many more options than they had going in. It is a matter of getting rid of bad habits and using the delayed gratification theory. If you do wise things today with your money, even though it may be hard and you can't have every thing you want, you will be much better off later.