Introduction
In today's economic climate, no one is immune to hard times, and many people find themselves in over their heads when it comes to debt. Credit counseling has become a popular resource, offering options for individuals who are struggling to pay back what they owe. Understanding what is involved in credit counseling can help to determine if it is the right solution for you.
What is Credit Counseling?
Credit counseling is an educational program that offers assistance to individuals who are facing financial difficulties. The counseling sessions may be face-to-face, by phone or online, and the sessions are typically offered by consumer credit counseling agencies, non-profit organizations, military organizations or government agencies. The counselors will assess your finances and work with you to develop a plan to repay your debt over a reasonable amount of time.
Benefits of Credit Counseling
Credit counseling can provide a number of benefits for individuals who are struggling with debt.
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Debt Management Plans - One of the primary benefits of credit counseling is that it provides the opportunity to set up a debt management plan (DMP). A DMP is a contract between the consumer and the creditor, which can provide lower interest rates as well as waive late fees and other penalties. This can drastically reduce the amount of money that needs to be paid back.
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Counseling Services - Counselors will provide advice and guidance to help an individual manage their finances more effectively so they can be better prepared for the future. This includes budgeting guidance and offering other helpful tips.
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Guidance and Education - Counselors will help an individual develop a realistic budget to help them manage their finances more effectively. Additionally, they will also provide education on a variety of topics such as how to avoid the debt cycle, understanding the importance of credit score and learning better money management skills.
Potential Drawbacks
While credit counseling can provide numerous benefits, there are also some potential drawbacks that should be considered.
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Cost - While credit counseling services are generally free or low cost, individuals may be required to pay a fee for the debt management plan. This fee is often included in the monthly payments and will be split between the creditor and the credit counseling agency.
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Impact on Credit Score - Although some credit counseling services inform the credit reporting agencies that the consumer has enrolled in a debt management plan, this in itself may negatively affect a credit score. It is important to review the credit report regularly to make sure the account is being reported accurately.
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Length of Time - In some cases, it can take time to negotiate a payment plan with creditors and setup a DMP. This can lead to a delay in getting back on track with bills and resolving the situation.
Exploring Credit Counseling
If you are struggling to pay off your debts and are considering credit counseling, here are some important steps to take:
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Research Credit Counseling Agencies - Make sure the agency is legitimate and a member of the National Foundation for Credit Counseling. Checking with the Better Business Bureau is also recommended.
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Ask Questions - Do not be afraid to ask any questions that you have. Some important questions to ask include:
- How much experience do they have in dealing with creditors?
- How long have they been in business?
- What fees are associated with their services?
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What types of debt are they experienced in dealing with?
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Go In With a Plan - Before attending any sessions with a credit counselor, take a look at your finances and come up with a plan. This will help the counselor to come up with a solution that works for you and will make the process smoother.
Conclusion
Credit counseling can be a significant help for individuals who are struggling to pay off their debts and need assistance in creating a plan of action. Taking the time to learn more about credit counseling and its potential benefits and drawbacks can help you make the best decision for your situation.