Credit Counseling

May 7th 2016

When you're falling deeper into debt, it's not always clear what the best path is. Should you continue making your minimum payments and let interest compound? Put off one credit card to pay more for another? Consider debt consolidation or bankruptcy? Sometimes the smartest thing to do is pass the hard work on to someone else, and that is where credit counseling comes in.

What Is Credit Counseling?

Credit counseling is a service that works with you to determine the best way to handle your debt. Most often, credit counselors will negotiate a debt management plan (DMP) with your creditors to help you repay your debt by working out a repayment plan directly with the creditor. DMPs usually offer reduced payments, fees and interest rates to the debtor. Unlike debt consolidation -- where consolidators pay off your balances in exchange for a loan that you pay back directly to them -- credit counseling is a mediation process, where the counselors work with your creditors to help you pay off your debt directly to the original creditors.

How It Works

Through counseling, the educators will help debtors learn how to avoid incurring debts that they cannot repay through a DMP, such as HP car payments, rent, utilities and mortgages. DMPs are only used to eliminate unsecured debt, like personal loans, credit cards, bank overdrafts and store cards. Following a consultation, the counselors can determine which debt management plan is most effective for you.

Credit counselors do not always enroll you in a debt management plan. However, if you are in a substantial amount of debt, then they will likely encourage you to. Upon this encouragement from a professional, review the two main types of DMPs.

Fee-chargers: Fee-charging DMPs will usually have an upfront administrative charge to initiate services, and then an ongoing management fee for the duration of your account with them. While this may seem unsavory, fee-charging companies have been known to offer enhanced support and services to the debtor throughout the program.

Free or low-cost services: Non-fee or low-fee DMPs are usually offered by nonprofit government or charity organizations who offer credit counseling to consumers. Some of these organizations will claim charitable status to accept donations from the creditors with the promise to administer debt plans on their behalf.

Whichever credit counseling service you choose, the organization is required to inform and educate you, the debtor, with all other debt-resolving options before presenting a DMP. In the United States, these include re-mortgage, additional loan, debt management plan, full and final settlement, and bankruptcy.

By participating in a DMP, debtors risk hurting their credit score. While the credit counselors do not report your DMP to credit reference agencies, some creditors may choose to do so. This can leave a default notice on your credit report and affect your chances of being accepted for any further credit. However, if you already have a default on your credit record, then enrolling in a DMP is unlikely to further negatively affect your score.

So It's Time for Credit Counseling

After personally weighing the options of your debt situation, you may have decided to go with credit counseling. Always note this piece of information before seeking out a credit counseling agency. During the '60s, just a decade after credit counseling agencies were created, there were over 1,000 active agencies in the country. Today, there are fewer than 300. This is due to an investigation into the practice by the National Foundation for Credit Counseling (NFCC), which discovered malpractice in many of the large agencies.

For this reason, you should consult with several agencies before signing on with one. Read contracts carefully to ensure you are not paying the counseling service any more money than they deserve or than you are comfortable with paying them. Also, some fee-charging agencies are notorious for having ties with creditors. For this reason, you should research shareholders and company affiliations to ensure your credit counseling service does not present any major conflict of interest.

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