Pennywise
Credit Counseling
by: Sahil | last updated: December 02, 2009
Category: Standard Credit Cards | Tags: Credit counseling, credit advise, credit advice
Category: Standard Credit Cards | Tags: Credit counseling, credit advise, credit advice
Credit counseling is a broad term that offers education to customers about how to avoid debts that cannot be repaid. Credit counseling can be paradoxically debt counseling since debt is the direct result of having open lines of credit at your disposal. Credit counseling usually involves a debt management program (DMP) that aims to reduce the consumer’s debt by consolidating it.
The difference between debt management programs and debt consolidation is that there is a third party to the contract. The credit counseling entity can be a for-profit company or a non-profit organization. This means that the customer pays only one payment per month instead of multiple payments.
An advantage of such companies for those who are deep in debt is that the interest rates of the lenders may come down. Some creditors may even waive off the interest rate completely. However these features may differ from one country to another according to the various laws and guidelines.
In some countries such as United States people who have filed for bankruptcy are obligated to go through credit counseling and complete the program within 180 days of filing for bankruptcy. This was the result of Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 and may include but not limited to one counseling session over the phone or the Internet.
The most important feature of credit counseling is the debt management plan which consolidates the numerous debts into one and reduces the interest rates on the complete amount that is owed. A third party re-negotiates the rates with the creditors and acceptance of terms put forward by the third party is always at the discretion of the creditors.
It is very important to take care that you do not opt for such counseling just because you are trying to make ends meet. Debt management plans can have an adverse effect on healthy financial reports and history. The best time to take up a debt management plan is when you are not able to pay for the bare minimums such as rent or mortgage, food, or utilities.
The effect of credit counseling on credit reports can be devastating; especially if you have filed for bankruptcy. The bankruptcy will remain on the report for at least ten years and the fact that you were in fact in a DMP will deter any future lenders. Therefore it is very important to consider other sources such as balance transfers to lower rate credit cards or self-debt consolidation.
Another disadvantage of a DMP is that the debtor may have to pay a fee or a percentage of the complete amount owed to the debt management agency. This can add to the expenses of the person even after he or she becomes debt free. Some critics have also pointed out that these debt management agencies are just collectors for creditors who can manage the debt themselves.
The only time when credit counseling is recommended or required is when a person is facing bankruptcy. In such cases these programs or plans may even prove to be helpful in the long run and improve your credit scores in a couple of years.
Credit counseling has drawn criticism especially in the United States where many people find themselves victims of the debt management companies that only act as collection agencies. Credit counseling agencies may also receive remuneration from the creditors making them more creditor-friendly.
Thousands of complaints have been filed against the numerous credit counseling agencies by consumers who say they are unable to opt out of the voluntary payment program. The agencies have also been accused of having very high fees and hidden costs which make them get the best of both creditors as well as debtors.
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