Credit Counseling

What is Credit Counseling?

Credit counseling, otherwise known as debt counseling, is a service that is meant to provide assistance and support to struggling debtors and their creditors. Its main purpose is to help individuals reduce and ultimately eliminate debt via the introduction of debt education and personalized budgeting. Along with financial budgeting, some credit counselors are willing to negotiate with creditors on behalf of the borrower in hopes of lowering high interest rates and reducing costly late fees. Some debtors are in such financial distress that repaying their debt seems out of the realm of possibility. In these circumstances credit counselors can act on behalf of the debtor to reach a deal with creditors to resolve said debt. In the United States credit counseling is a mandatory prerequisite for those filing Chapter 13 bankruptcy.

Some credit counseling agencies are non-profits and will provide counsel free of charge, while others may be for-profit and typically include high fees. The credit counseling industry has a reputation of deceit and misrepresentation, and because of this debtors must be on the lookout for the red flags. Some of these signifiers include offers of unrealistic promises or the demand of large fees upfront. An agency’s potential affiliation with the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA) would be indicative of that agency’s legitimacy.

Utilizing the NFCC

The National Foundation for Credit Counseling was established in 1951 and is the longest standing nonprofit financial counseling organization. The NFCC aims to promote financially responsible behavior through high quality financial education and counseling services.

The practice of credit counseling originated in the mid-1900’s and was introduced by creditor banks and credit card companies in order to address the alarming rise of personal bankruptcies. Modern debtors are experiencing the same plight as they wade through consumer debts primarily comprised of home loans, credit cards, and car loans. The NFCC intends to give support as they are currently counseling more than a million consumers each year in person, over the phone, and online. Proving their accessibility, the NFCC has offices in all 50 states as well as the District of Columbia and Puerto Rico with open lines of communication by means of telephone or email.

Debt Management Plan

Credit counselors intend to educate by offering customized financial strategies in conquering debt. One popular option for recovery is called a Debt Management Plan (DMP). Only individuals with severe debt are eligible for this carefully executed plan, wherein the counselor becomes proactive in mediating and supervising a debtor’s path to repayment.

A DMP is a formal agreement between a creditor and a debtor, negotiated by a credit counseling agency in an attempt to reduce outstanding debt and assist the debtor in regaining control of their finances. Typically agencies will work with the debtor to formulate a budget that is specific to their needs, considering such factors as an individual’s income as well as their expenditures, or spending habits. This tailored budget will prompt the debtor to deposit a reasonable fraction of the debtor’s income each month to the credit counseling agency, who will subsequently pass them along to the creditor.

A primary advantage in participating in a DMP is the ease offered when all of the payments to the creditors are consolidated into one swift payment to the credit counseling agency. This systematic repayment plan takes approximately 36-60 months to repay debts. An additional advantage to this plan is the potential for lowered or waived finance charges, fees, and fewer debt collection calls.

What Are the Possible Solutions for Debt

A credit counselor will conduct an analysis of an individual’s personal records and determine what option is best in avoiding bankruptcy and finding eventual liberation from debt. Aside from a Debt Management Plan there are a few options that may be recommended by a counselor. These options include the debt snowball method, debt relief, and debt consolidation.

The debt snowball method is a budgeting concept that systematically addresses the crushing weight of one’s multiple debts. Dave Ramsey, a trusted financial advisor, champions this snowball method, as small steps are used to accomplish something much greater. This strategy instructs the debtor to begin paying off their smallest credit balance first and once that is repaid in full the debt snowball moves forward to pay off the next smallest balance that is owed. Not to be forgotten, in the meantime one should be paying the minimums due on all other debt obligations. This process of overcoming smaller debts continues until much of the debt has been exponentially eliminated. This snowball strategy is often juxtaposed with the debt stacking method, otherwise known as the debt avalanche method in which one pays off accounts with the highest interest rates first. Consulting with a credit counselor is the most effective way to ascertain which method is right for you.

On some occasions options like debt relief or debt consolidation can be negotiated by credit counseling agencies. Debt relief, also referred to as debt cancellation, is the total or partial forgiveness of an individual’s debt. Similar to debt settlement, it involves a re-organization or a restructuring of one’s debt.

All of these choices are opportunities for debtors to get a handle on their financial situations and are successfully facilitated by experienced members of credit counseling agencies such as NFCC.

Debt clearing is made possible through strong relationships between creditors and credit counselors. Credit issuing institutions have been long-time proponents of the counseling services due to their shared goal of reducing the odds of a debtor declaring bankruptcy. The feeling of helplessness that comes with debt can be overpowered by taking full advantage of the many support systems put in place for financial guidance and assistance.

Impact to credit reports and scores

From a credit scoring standpoint credit counseling is the closest thing to Bankruptcy. Not only are the scores penalized but the time it takes to recover is lengthy. Once a debtor/consumer completes the program the scores do not simply improve due to completion. The profile and scores will improve by building the credit profile, which takes time. It is important to know all of your options and their impact on your credit scores and financial future before you enroll in any program.