For those who are struggling with debt repayment, credit counseling may seem like a very attractive option. There are lots of companies out there claiming they can help you get your interest rates and principal reduced, or make your delinquent accounts go away altogether.
Before you pay someone to manage your debt for you, find out what credit counseling is all about, and how to spot a dishonest operation.
Who Benefits From Credit Counseling?
Credit counseling is meant to help those who are unable to make their minimum payments on debt repayment each month. These same people are often struggling in other ways financially, and may even be having a hard time meeting their basic needs. For those looking for some relief from the pressure of frustrated creditors and collection agencies, credit counseling can help. But there are other options for debt relief that may be better though, such as bankruptcy, so it’s best to do some thorough research before settling on credit counseling.
What do Credit Counselors Do?
Credit counseling is a general term that is most often used to refer to two types of services; debt settlement, and debt management programs. Many agencies provide both of these services, but be leery of agencies that don’t offer debt management programs. Debt settlement is when the credit counselor works with your creditors and collection agencies to negotiate a payoff amount for your accounts that is much lower than the amount you owe.
A debt management plan involves the credit counselor contacting all of your creditors and negotiating a repayment plan that requires a lower monthly payment. They may also secure a lower interest rate, and have fees and penalties excused. You then give the credit counselor a lump sum payment each month, which they distribute amongst your creditors until your debt is eliminated. Debt management plans usually take between 3 and 5 years to complete. Reputable credit counselors are ones who offer debt management plans, who are approved by the National Foundation for Credit Counseling, and who work for not-for-profit agencies.
What are the Drawbacks of Credit Counseling?
Credit counseling may seem like a win-win situation, but there are some drawbacks that you need to be aware of:
- Debt settlement offers that are accepted can save you a lot of money on repayment, but they report to your credit as “settlement accepted by creditor” or “partial payment plan,” which are both negative marks.
- Your credit will be very limited while in credit counseling. You will not be able to take on any new accounts or use any of the accounts you’re currently having the credit counselor work on. Many credit counseling agencies are actually dishonest, fly-by-night companies that will take advantage of you in your vulnerable state.
- Credit counseling services only apply to unsecured debt, and not to secured debt, such as a mortgage. This is why Chapter 13 bankruptcy is sometimes a better option.