Anna Fleet

01/12/2008

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What Exactly is Credit Counseling?

What a Credit Counselor Can Do for You.

While some pay opt for the path of shifting debt or debt consolidation to bring unmanageable debt under control, credit counseling may be an attractive option for some, depending on the circumstance. A credit counselor will work with you to bring your spending habits under control, and may also work with your creditors to negotiate better repayment terms. This may mean negotiating a lower interest rate, lower monthly payment, or even agreeing to a “settlement” payment that repays an amount lower than what is actually owed.

The most legitimate activity of a credit counselor however, is counseling. They are there to work with you directly, to help you create and stay on a budget. The best credit counseling relationship is one where the counselor will help you go over your bills and pay them on a timely basis. Counselors who merely ask for a lump sum of money and then pay your bills on your behalf is not doing their job, and may be causing you some serious damage.

Ultimately, taking out a home equity loan or using debt consolidation may cost more. For example, if you take out a 15 year home equity loan to pay off credit cards, your monthly payment may be less, but after the 15 year term, it’s very likely that you will have paid more interest overall. This is not necessarily a negative, however.

The home equity option, although it really only shifts debt from one place to another and allows it to be repaid on different terms, will not necessarily be seen as a negative on your credit report, and it can help to improve your credit over what it would otherwise be, if you are getting into a situation where you can make your home equity payments on time as opposed to paying credit card payments late.

A credit counseling agreement, however, especially one which attempts to negotiate reduced payments with your creditors, may result in a negative strike on your credit. Even if you are making the negotiated payments on a timely basis, the mere fact that it has been negotiated is seen as a negative, since you are not repaying the debt in the original terms.

This sort of debt negotiation would for example, be a deal where the negotiator offers to pay 50 percent of a balance owed on a credit card, paid over an agreed upon period of time. Even if you do make these reduced payments on a timely basis, it is still negatively viewed. It is an action of last resort, and any reputable counselor will make every attempt to avoid negotiated payments at all costs.

If a home equity loan is not a possibility, and there is no other way to gain control over your situation, credit counseling may be very useful. A reputable counselor will not only help you negotiate better terms, they will also help you change your behavior, and get better control over your personal financial situation.

However, credit counselors are like any other professional or quasi-professional, there are some good ones and some out-and-out crooks. Some of them will care little about whether or not you pay your debts, they exist only to collect fees from you, and may create payment plans and schedules that are, in fact, unrealistic.

Less reputable credit counseling agencies simply take a fee from you, and ask you to make a single lump sum payment to them, and then allow them to make negotiated settlements and pay your bills on your behalf. This is not credit counseling, it is only bill paying services. This is a dangerous practice, will actually damage your credit, and can be very costly. A legitimate credit counselor will do much more. They will work with you to help solve your problems at the source, and work with you on a continuing basis to help solve your problems and stick to a budget. If necessary, they will also be able to work directly with your creditors.

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