What is credit counseling?
You've got bad credit and have heard something called credit counseling may help. But what is credit counseling and what can it do for you?
Consumer credit counseling is provided by various agencies across the country that work to help you get on the road toward financial stability, potentially boosting your credit score at the same time.
Credit counseling agencies can give you advice on smart use of credit, creating a budget, paying bills and managing money and if necessary, can set up a debt repayment plan with your lenders.
Once you have chosen a credit counseling agency, you then will supply information about your earnings, expenses and debts. The credit counselor should evaluate your information, discuss it with you, and help create a plan tailored to your situation.
The credit counselor may suggest anything from taking a financial education class to visiting a state employment agency or even a relationship counselor in order to address nonfinancial problems you are facing.
If excessive debt is burying you and leading to bad credit, the counselor can help set up a debt management and/or debt repayment plan. These usually only cover unsecured debt, like credit cards.
Under a debt management plan (DMP), the counselor will set up an arrangement with your creditors that allows you to repay unsecured debts at lower interest rates. The credit counseling agency negotiates with lenders in order to reduce interest rates and eliminate late fees and other penalty charges.
With a DMP in place, you will be expected to make regular monthly payments to the credit counseling agency. This has the added benefit of offering you the opportunity pay the credit counseling agency each month rather than sending various payments to a number of creditors. Payments are then applied to your debts based on a payment schedule put together by the counselor through discussions with you.
There are fees for credit counseling services that you should ask about before enrolling since they can vary across agencies. Members of the National Foundation for Credit Counseling and the Association of Independent Consumer Credit Counseling Agencies are held to standards that limit how much they can charge for services.
Additionally, certain states have strict limitations regarding how much credit counseling services can charge.
Generally, a successful DMP requires 30 to 60 months to complete. Consumers who have bad credit will need to agree to not apply for more credit or take on any added debt while the repayment plan is taking place.
You should be provided with regular statements from the credit counseling agency that show how your money is being distributed. If you find that for some reason your lenders are not being paid, immediately contact the agency to find out why.
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