Credit counseling or debt counseling refers to educating consumers about ways to prevent incurring debts which are difficult to be repaid.
Credit counseling entails negotiation with creditors for establishing a debt management plan for a customer. A debt management plan helps the debtor to repay the debt by devising a repayment plan in consultation with the lender. The plans may include offering reduced payments, interest rates and other charges.
Role of credit counseling agencies
A proper credit counseling agency eliminates credit card debts in a highly cost effective manner. The agency saves your valuable time as well as energy which you would have otherwise invested on independent research, to find out ways of tackling the debt trap.
All the employees of the credit counseling services and debt management must be suitably trained professionals having expertise in the accounting sphere. Consumers need to share their personal financial details with the counselors. Thus these people should be trustworthy and dependable for confidentiality.
The plan of action devised by the credit counseling agencies to help consumers extricate themselves from the debt trap generally follows this pattern:
• Majority of credit counseling service under debt management program will suggest for consolidation of several monthly payments into a single payment. This amount is generally less than the total amount paid individually by the customer previously. The reason is that credit card banks will generally accept a less amount of monthly payment from a client enrolled in a debt management program, in comparison to a customer who pays on his own. Certain programs proclaim that payments can be drastically cut by 50%, though a 10% to 20% reduction is common.
• A DMP or a debt management program offers interest rates reduction. A client having a defaulted account of credit card will certainly have to pay a high interest rate of 30% or so. Being a part of DMP will make the credit card banks decrease the APR or annual percentage rates to 5% or10%, and sometimes eliminate overall interest. Thus credit counseling agencies help customers become debt free in a matter of 3 to 6 years.
• Credit counseling agencies help in “curing” or “reaging” delinquent accounts. Customers have to make a series of timely payments through the DMP as a mark of commitment and good faith towards the completion of the plan. Thus a customer whose monthly due is $50 and who has not been paying the amount for the past two months will be considered as 60 days due by the lender. However after enrolling in the DMP and subsequent to paying three consecutive payments, the creditor can go about reaging the account. As a consequence, payments due per month reflecting on the statements would be the amount that has been settled by the DMP. The client gets to start afresh in the process towards building a good credit history.
All said and done, the borrower must opt for a reputable credit counseling service that would provide value for time and money by offering suitable credit management guidelines.