Credit Counseling

Credit counseling, also known as debt counseling, is a process meant to instruct consumers in methods to lower their debts and to spend more wisely in the future. It almost always involves negotiation with creditors in order to create a debt management program by which the consumer can pay back his or her debt. These debt management programs usually involve lowered payments, interest rates, and fees and make credit counseling a appealing prospect.

After beginning a credit counseling program, the consumer’s accounts will be closed to all new charges. The monthly payments will also be consolidated to one lump sum that is usually less than the total of all previous minimum payments. Possibly the most appealing aspect of a credit counseling program is the dramatic decrease in interest rates that the debtor may receive. These rates may drop from an outstanding 30% to a reasonable 5% to 10% and on rare occasion interest may be dropped altogether. Through a series of prompt payments the consumer’s delinquent accounts can be made current. This won’t help the debtor’s credit score, but it will provide him or her with an opportunity for a fresh start at building their credit.

Credit counseling agencies first appeared in the 1950s with the purpose of promoting financial literacy and preventing bankruptcy. The Association of Independent Consumer Credit Counseling Agencies was formed in 1993 and consisted of a group of credit counselors who provided their services over the phone. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made credit counseling mandatory in order to file for bankruptcy in the United States.

Credit counseling services have not been without their fair share of criticism; in fact, the Fair Trade Commission and the Better Business Bureau have received over 8000 complaints concerning about them concerning hidden fees and inability to opt out of some payments that were considered voluntary. The IRS continues to audit and otherwise investigates credit counseling business and has revoked the tax-exempt status from over 30 of the main 100 companies. Many claim that these businesses favor the credit card companies over consumers although they claim they don’t take sides.

The issue of whether taking part in a credit counseling program will hurt a person’s credit is still open to debate and remains an issue of importance to most consumers. The truth is that while it should not harm a person’s credit score, record of their participation will stay on the person’s credit score and will deter them from receiving Loans and lines of credit in the future.

When considering enrollment in a credit counseling program, the consumer should shop around the many different business that offer a debt management program and should contrast and compare the differences between them such as the fee structures and whether they are a for profit or non-profit agency as well as the different services provided by each one. They should also keep in mind that the service will stay on their credit report for 2 to 3 years.