With the typical American family carrying around $11,000 in credit card debt it is likely that many people have considered strategies for getting out of debt. For consumers struggling to manage their credit card debt, credit counseling can be a great step toward financial stability. But what is credit counseling and how does it work?
Non-profit credit counselors have been around for decades, supported by financial institutions that want to protect their assets as well as their customers. The premise is simple: creditors cooperate with credit counselors to provide relief for clients who can benefit from reduced interest rates and payment amounts to repay debts.
How It Works
Step one: A client calls a credit counselor, and the counselor performs a budget analysis. The counselor will look at client’s income, fixed expenses, and variable expenses to determine what the client’s budget currently looks like, and what it should look like.
Step two: The credit counselor recommends a course of action. Some clients will be encouraged to just stick to the newly developed budget. Some clients will be advised to seek legal advice. And some clients will be invited to participate in a debt management plan (DMP).
Step three: If the client qualifies for a DMP, the credit counselor will arrange for concessions from creditors to lower interest rates and determine a monthly payment for the client. This payment may include a fee for the credit counseling agency, but the total payment will still be less than the amount of payments without the DMP. Most credit card accounts will be closed.
Step four: The client will make a monthly payment to the credit counseling agency, and the agency will disburse funds to creditors. All late payment notices and collection calls will stop, and the client will be able to work with the credit counselor if any issues arise.
Step five: The credit counseling agency and the consumer cooperate to deal with any issues and reduce balances. The typical consumer can eliminate balances within 3-5 years, which is typically much shorter (and costs much less in interest) than if the consumer was making minimum payments on their credit cards.
What About Financial Impacts?
Many consumers wonder about the effect of credit counseling on credit. By federal regulation, credit counseling is not reported to credit reporting agencies and does not appear on credit reports. Taking a 3-5 year break from using credit can cause credit scores to decrease somewhat, but many credit counseling clients are able to quickly recover and use credit normally again or even buy a home.
Many consumers also wonder about living on a budget without being able to resort to credit cards as they did for years. This can be challenging for consumers who have relied heavily on credit for a long time, but most are pleased when they realize that they have learned how to budget and live within their means. Clients who complete debt management plans often report that it is life-changing once they are free from their credit card debt.
And some consumers are afraid to ask what happens if they give up and quit. The consumer still has whatever savings they built while on the plan and goes back to the situation before the DMP. The unpaid debt is still there, and interest rates and penalties usually revert to where they were before the DMP. The creditor will expect payments to resume as before the plan; however, there are no penalties from the credit counseling agency for withdrawing from a DMP.
Many consumers are afraid to call for credit counseling because they think they will be judged or looked down upon. Credit counselors are trained to be empathetic and to care, not judge.
Take Charge America has certified credit counselors ready to help you build a strategy to pay off your debt and build a more secure financial future.
