What is Credit Counseling?
Credit counseling is a professional counseling service that helps consumers in repaying their debts. It also educates the consumers about credit,
budgeting, and financial management.
How does it work?
Once you consult a credit counselor, he or she examines your overall financial status. Given below are the items that are taken into account while assessing your financial status:
- Total debt amount
- Rates of interest on different loan accounts
- Minimum payments for credit cards
- Other financial obligations like child support, medical expenses, insurance premium, utility and many more
- Total monthly income
After evaluating your financial status, the counselor prepares a repayment plan for you which is in sync with your budget. Then the counselor sends the proposed plan to each of your creditors for approval. Once your creditors agree to the repayment plan proposed by your counselor, you start making payments to the credit counseling agency. The credit counselor then distributes the payment to each of your creditors in accordance with the repayment plan.
When should you go for credit counseling?
- If you have already missed a few payment dates and do not want to go through the hassles of negotiating with your creditors.
- In case you are anticipating a possible hardship in near future, then you might benefit from it.
- If you are current with your accounts but afraid of falling behind, then it is advisable that you see a counselor to find a suitable way out and protect your credit.
- If you are planning to file for bankruptcy. As the new bankruptcy law, 2005 has made it mandatory to undergo credit counseling session before filing bankruptcy.
How a credit counseling agency can help you in paying off your debts?
The counselors usually have good contacts in the credit industry; thus, they can negotiate better repayment terms with creditors. They even negotiate with the creditors to lower the interest rates, waive past late fees and "re-age" your past due accounts to a current "paid-as-agreed" status.
How much will it cost?
There are two types of credit counseling agencies: non-profit and the ones that work against a nominal fee. The fees charged are often based on your monthly payment, the typical fees structure include a start-up fee plus a monthly fee. According to the industry experts, the fees charged should not be more than 20% of your monthly payment.
Why would a credit counseling agency would work without a fee?
The counseling agencies usually receive a particular portion of the fund paid to the creditor, known as Fair Share. For example, 16 PLUS - WFNNB offers Fair Share of 5% on each transaction.
Word of caution: There are few agencies that pretend to be non-profit, but in reality they use your first payment to cover their fees, or will deduct a flat amount from your monthly payment. Be wary of such companies. Even if the credit counseling agency says it's non-profit, that doesn't mean the services provided to you are free. Thus, prior to zeroing on any counselor, it is important to
ask a few important questions.
Will it affect your score?
A comment stating that you are making payments for an account through a credit-counseling agency will appear on your credit report. The comment stays on your report until the account is paid in full. However, such a comment won't hurt your
credit score as Fair Isaac Corp. since 1999 has ignored any credit-counseling information while calculating a consumer's credit score.
Will the counseling program affect your ability to obtain new credit?
It depends on the creditors. Some creditors may view a borrower who is enrolled in a credit counseling program as too risky to merit approval of a new loan. Whereas, other creditors might view it as a positive step, that the borrower has taken responsibility of his/her own unmanaged finances and is serious about paying off the debts.
What is the time taken to complete the program?
It is pretty difficult to anticipate how long it will take to get you out of debt. Several factors work behind it. Let's consider an example: if you pay $ 500 per month it will take 10 months to repay a $ 5000 loan in full. But, if you decide to pay $ 250 per month, the repayment period is likely to be doubled. Usually counselors design the program in such a way that you can become debt free within 2 to 4 years.
Try the debt to income ratio calculator and get a rough idea on how long it can take for you to get debt free. For any query you can
ask our community, a group of people with similar experiences.
Why would the creditors agree to the repayment plan proposed by your credit counselor?
Most of the mainstream creditors prefer to work with consumer credit counseling agencies because it saves them a lot of money and energy. Creditors get a fair portion of their funds back through credit counseling services, which they won't get back if the consumer is forced to file
bankruptcy.
What should you do if you discover an error with the bills paid through your counselor?
In such a scenario, you must report the company to your local consumer protection agency or state attorney general's office. You can also file a complaint against the company at the
Better Business Bureau. You must also contact your creditors and explain to them the reason for the discrepancies in the payment of the bills.
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