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Consumer credit counseling, as the name suggests, offers counseling to consumers in relation to how they use credit.
Credit Defined
Credit may sound like only credit cards, but the truth is that many people use various different types of credit throughout their lives. They might start with a credit card and student loans. Then they lease a car. They might get a mortgage on a home. Then they take out purchasing agreements for great TVs and furniture for their home. They love to shop at certain stores, so they take out a store credit card and use it for all their purchases because they get “free” items and discounts.
Good Credit, Bad Credit
On the one hand, credit is good, because using credit and then paying back the money shows that you are a financially responsible person. All of this activity is reflected in your credit score. A good credit score means you can often get credit (such as a mortgage) for a lower rate than someone with a lower credit score.
On the other hand, it is easy to lose track of one’s credit. There are so many offers floating around for 0% APR for the first X months that it can be tempting to sign up for the card, make a big purchase, and then sort of forget about it until the bill is about to fall due.
Credit can also be a problem if you max out your cards, because the more you borrow, the lower your credit score.
The Evils of Interest
The most obvious problem is that if you do not pay back the balance on the card within 30 days, you will have to pay interest. High interest payments means a poor credit score. This is how credit cards and banks make such high profits. The interest you are paying is a loss to you, but a gain to them.
Look at any credit card bill and you will see a projection for how long it will take you to pay off your debt if you only pay the minimum each month. In some cases, you might see a projection of ten or more years. Just think how much money you could save if you were to pay down that debt in a structured way, and then stay out of debt.
Understanding Credit Counseling
Reputable credit counseling organizations employ trained and certified staff. These counselors can talk with clients to help them develop a personalized plan for their credit issues. An initial counseling session typically lasts one hour, with an offer of follow-up sessions. A reputable agency should offer information about its services free of charge without requiring potential clients to disclose details about their situation.
Credit counseling companies can help you create a debt management plan (DMP), which allows you to make a single payment toward your debt each month. Under a DMP plan, the consumer deposits money each month into an account within the credit counseling organization. The organization uses the funds to pay unsecured debt, such as credit card bills, student loans, and medical bills.
These debt payments follow a schedule the counselor and consumer develop together. Often, creditors will need to agree to the scheduled repayment plan. Creditors may decide to lower interest rates or waive fees. A successful DMP requires regular, timely payments. It may take 48 months or more to complete a debt management plan.2
It’s important to note that credit counseling and agencies that provide these services are not the same as companies that offer debt settlement or debt consolidation services. Debt settlement involves the negotiation of a reduction in the total amount of debt owed. This is something you can do on your own or hire a debt settlement company, which typically involves a fee. Debt settlement can help you eliminate debts for less than what’s owed and avoid bankruptcy, though it can have negative consequences for your credit score.
We represent new beginnings and new hope for those in need of a better tomorrow with improved credit scores.
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