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Credit Counseling - How It Helps

What is credit counseling?
Credit counseling is basically a counseling service that helps you out regarding the repayment of your debt. They also give you advice regarding the importance of budgeting, financial management, and the evils of credit.

How does it work?
Once you engage the services of a credit counselor, he / she checks out your financial status. The pointers that the credit counselor takes into consideration when assessing your financial status are:

  • Total debt owing
  • The interest rates charged on your different loan accounts
  • The minimum payment required for the credit cards
  • Your other financial obligations such as alimony, child support, medical expenses, insurance, etc.
  • Your total monthly income

Once he gets information about your financial status, the counselor prepares a repayment plan which will fit into your budget. The counselor then sends a copy of the plan to all of your creditors for their ‘approval stamp’. Once they give their approval, you then start paying a fixed amount every month to your credit counselor, who will then pay all your creditors according to the repayment plan.

Do you really need credit counseling?

  • If you’re already late on your payments, and you don’t want to go through the trouble of negotiating with your creditors
  • If you forecast some possible financial difficulties in the future, credit counseling may be a good idea.
  • If you’re currently good with your creditors, but scared of possibly falling behind on payments, then it’s a good idea to see a counselor so that you can safeguard your credit rating.
  • If you’re thinking of filing for bankruptcy. The new bankruptcy law, which came in force in 2005, makes it mandatory to seek the services of a credit counselor before you file for bankruptcy.

Will credit counseling affect your credit score and your ability to obtain credit?
Your credit report will have a note stating that you are settling your creditors via a credit counselor. This note will stay in your file till you have settled all your accounts in full. However, this is not taken into account when calculating your credit score.

As far as the creditors are concerned, it varies from creditor to creditor. Some creditors may consider a person enrolled in a credit counseling program as a high risk, but others will consider you favorably since they’ll feel that you’ve learnt to take responsibility of your debts, and are serious about paying back your debt.

How long would it take to settle your debts?
It really depends on how much you agree to pay every month. The more you pay, the lesser the time it takes. Most credit counselors endeavor to try and finish off all your accounts within 2 – 4 years.

Why would creditors agree to such an arrangement?
It saves them a lot of hassle and money, or else they’d have to make frequent calls, maybe visit your premises, or even threaten legal action against you, which may be bad publicity for them.