Credit And Debt Management: Credit Counseling
by Cathy Pareto
Credit counseling can be an appropriate solution for consumers who find themselves overwhelmed by their credit obligations and need help restructuring what they owe. While not all credit counseling agencies are created equal, the reputable agency's goal is to help consumers gain better control of their financial situations by providing education and debt-counseling services to consumers in need. Also, as mentioned in the previous section on debt collectors, credit counseling is required for debtors seeking chapter 13 bankruptcy protections.
Finding a Reputable Credit Counseling Firm
Unfortunately, the credit-counseling industry is unregulated. This lack of regulation has introduced the possibility that some so-called counseling or debt-settlement agencies are nothing more than profit-seekers preying on vulnerable, unsuspecting consumers. Many counseling agencies pose as nonprofits and get away with grossly overcharging clients for services, implementing monthly fees, conducting questionable or illegal business practices and doing little to negotiate with credit card companies to reduce their clients' rates and/or debt. In the last six years, the FTC has filed more than a dozen civil actions against such companies.
Anyone seeking credit counseling should do so with a reputable nonprofit organization. An excellent consumer resource for finding such an organization is the National Foundation for Credit Counseling (NFCC). NFCC is the national voice for its member agencies, which are nonprofit, mission-driven, community-based consumer counseling agencies that provide budget counseling and education, debt-management plans, counseling referral services, financial literacy courses and housing information.
Once you have narrowed down your list of potential agencies to work with, conduct some due diligence on them by confirming their statuses with the Better Business Bureau (BBB), your state's attorney general or a local consumer protection agency. Additionally, the FTC's website offers some excellent tips for choosing the right credit counseling organization. Trustworthy agencies will typically send you free information, including details of the services they provide. They need not ask you for any details about your financial situation. If you are required to provide specific financial details about yourself, pay any upfront consulting fees or retainers, or sign any paperwork before acquiring information about the firm, consider this a red flag and run away. (Learn more about how to find the help you need in How To Find A Credit Counselor, or how to do it yourself in Seven Tips For The Do-It-Yourself Debt Manager.)
What to Expect From Credit Counseling
A credit counseling agency helps the client identify his or her creditors and assess the debts due and the monthly payments they are committed to. It structures a plan for the debtor and then negotiates with creditors on behalf of its clients to reduce the consumer's interest rates, payments, debt amounts or some combination thereof. The goal of the credit counseling agency is to help you find a payment plan that you can afford (assuming the creditor approves of the arrangements) and target a specific payoff date to make you debt-free. These programs primarily service consumer-related debts, such as personal loans or credit cards; however, mortgages are not typically included.
The idea behind a debt-management plan is that while you can afford to make some type of monthly payment, you need help negotiating with your creditors on things like interest rates (they often reduce or eliminate interest altogether) or monthly payment amounts. This type of plan is voluntary. It is not a legal agreement between you and your creditors. It typically lasts for no more than five years, and it is expected that you will not apply for or use credit during the length of the program.
With this plan, you typically deposit a fixed payment each month with the credit counseling agency, and they in turn use this money to pay the creditors outlined in your program. This helps the agency centralize your cash flows and ensures your timely deposits and payments to your creditors. They pay the debts each month on your behalf, subject to whatever arrangements (ex. rate reduction, payment reduction, revised billing cycle) they have negotiated for you. For this service and for the negotiations made on your behalf with your creditors, the agency collects a nominal fee.
So, how will this affect your credit? If you are enrolled in a credit counseling program, it's likely that you already have a history of late payments and overutilization of credit that have already negatively impacted your credit score. While creditors will appreciate your efforts to enter a debt-management plan that demonstrates your desire to repay your debts, your credit score may nevertheless be affected. In fact, your participation in a credit counseling program may show up on your credit history. Creditors will likely hesitate to extend further credit to you, even after your counseling is completed, until they can see a couple of years of solid repayment history on your credit report.
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