Credit Counseling, or Debt Counseling: Why It’s A Good Thing

gavelThe point behind credit counseling is to educate the one being counseled about debt, how to avoid it in the first place, and how to contend with current debt.

Without judging anyone’s debt , the credit counseling company attempts to help the individual establish a rigid debt management plan that can be easily adhered to and is designed according to your current financial position, or DMP, and then presenting that debt management plan to the creditors as a way to lower payments, structure a  re-payment schedule, and navigate the treacherous waters of credit card debt.

One of the first things that happen through the credit counseling company and the DMP they set up for the customer is that they will close all of the credit card accounts.

All of them, which is a great thing if you think of it, considering that credit cards are one of the main causes of throat-cutting debt not only in the United States, but also in Europe and many other countries around the world.

No more credit cards for the individual being counseled, and believe me, that’s all good. So if you are in debt counseling, bye-bye credit cards. More like good riddance.

This will restrict future charges being added to the credit card bills, and will take those credit cards out of the hands of the person struggling with the debt load of those credit cards.

The next step will be to consolidate all of those credit card bills, in order to present one monthly payment covering the payments of all of the credit cards.

After these steps have been taken the credit counseling company will negotiate a reduction in interest rate the credit cards are charging on payments, generally to the tune of 15-20% reduction.

It is rare to get a higher interest rate reduction than that, although it has been done before. So if a debt management company guarantees a 50% reduction in repayment interest, be careful going in.

Check out your Credit Counseling Company before engaging.

Sad but true, credit card counseling is a huge industry in the States, and there are many unethical practitioners out there.  Here are some warning signs in a credit counseling company that might indicate they are not on the up and up:

1) Are they licensed to do business in your state? If they aren’t, avoid them.  

2) Anything over fifty dollars as a consultation fee or donation fee per month is exorbitant, and is not the mark of an ethical credit counseling service. Your fees should be in the range of $15.00 to $26.00 per month, and no more. Ever.

3) There is no reason for them to hold your payment for any longer than 10 days, ever. Insist on knowing that information before you sign anything.

A check or money order will generally clear your bank in 3-5 days and their bank in approximately the same amount of time. If they indicate that holding onto your payments for 15 to 20 days is standard, do not use them.

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