Credit counseling can help with debt reduction in a variety of ways. The most common way is to have clients develop a budget aimed at paying off bills within a specific period of time. Counseling can also include assistance in working with creditors to reduce outstanding debts and signing the client up for a debt management plan in which payments are sent to a credit counseling company for disbursement. Counseling helps a person figure out which approach is best for his own financial situation.
Definition
Credit counseling is a service that helps financially overwhelmed consumers, according to the Federal Trade Commission. Credit counseling firms, many of which are nonprofit organizations, provide a variety of educational materials online and set up appointments to let consumers talk to professional counselors in person, over the telephone, through email or via an online chat. The main goal is usually debt reduction because most people who seek credit counseling can no longer effectively handle their debt.
Types
The two most common types of debt reduction offered to consumers by credit counselors are creation of a budget or a debt-reduction plan. A budget is a plan in which the counselor shows the client where she can cut expenses and how she can channel the money to most efficiently reduce debt balances. The counselor will review the client's income, expenses and total debt to create this plan. A formal debt reduction plan is more comprehensive. Kenneth Long, president of Vision Credit Education, explains that the counselor might negotiate with creditors to get reduced interest rates and waivers for late payment fees to bring down the amount owed. Then the client makes her monthly payment to the counseling service. Part of it goes to the service as a fee and the rest is sent out to creditors according to the terms of the plan.
Time Frame
The time frame for a budget can be indefinite because the consumer can alter it whenever she chooses. A debt reduction plan is formal, and the credit counseling agency remains involved, so it usually sticks to a determined time frame. Long says it might run as long as five years. The debt will go down steadily and be completely gone when the plan is fulfilled.
Benefits
There are many benefits to credit counseling and debt reduction. Consumers often get into financial trouble because they do not have the proper skills to manage money. A credit counselor can teach these skills as well as help people get out of debt. This helps them avoid future problems once their debt is reduced or eliminated. A debt plan requires a fee, but this can be offset by lower interest and elimination of late payment charges on credit card accounts. Most creditors will agree to put collection calls on hiatus for customers who are paying through a debt management plan.
Warning
The FTC warns that some credit counseling firms might pressure consumers into signing up for debt reduction plans, make unrealistic promises and charge excessive fees. It advises asking for a description of services in writing and checking out the firm with the state attorney general's office and the Better Business Bureau. The Nolo legal advice site recommends making sure the counselors are certified by an independent agency such as the Center for Financial Certifications, the Association for Financial Counseling and Planning Education, the National Foundation for Credit Counseling or the National Association of Certified Credit Counselors,
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