CREDIT
COUNSELING
Credit
counseling (known in the United Kingdom as debt counselling) is a process offering
education to consumers about how to avoid incurring debts that cannot be repaid.
This process is actually more debt counseling than a function of credit education.
Credit counseling
often involves negotiating with creditors to establish a debt management plan
(DMP) for a consumer. A DMP may help the debtor repay his or her debt by working
out a repayment plan with the creditor. DMPs, set up by credit counselors, usually
offer reduced payments, fees and interest rates to the client. Credit counselors
refer to the terms dictated by the creditors to determine payments or interest
reductions offered to consumers in a debt management plan.
Debt Management Programs
After joining a DMP, the creditors will close
the customer's accounts and restrict the accounts to future charges. The most
common benefit of a DMP as advertised by most agencies is the consolidation
of multiple monthly payments into one monthly payment, which is usually less
than the sum of the individual payments previously paid by the customer. This
is because credit cards banks will usually accept a lower monthly payment from
a customer in a DMP than if the customer were paying the account on their own.
Some DMPs advertise that payments can be cut by 50%, although a reduction of
10-20% is more common. The
second feature of a DMP is a reduction in interest rates charged by creditors.
A customer with a defaulted credit card account will often be paying an interest
rate approaching 30%. Upon joining a DMP, credit card banks sometimes lower
the annual percentage rates charged to 5-10%, and a few eliminate interest altogether.
This reduction in interest allows the counseling agencies to advertise that
their customers will be debt free in periods of 3-6 years, rather than the 20+
years that it would take to pay off a large amount of debt at high interest
rates.
A
third benefit offered by credit counseling agencies is the process of bringing
delinquent accounts current. This is often called "reaging" or "curing"
an account. This usually occurs after making a series of on-time payments through
the debt management program as a show of good faith and commitment to completion
of the program. For example, a client with an account with a monthly payment
of $50 which has not been paid in two months might be considered by the creditor
to be 60 days past due. After joining the DMP and making three consecutive monthly
payments, the creditor could reage the account to reflect a current status.
Thereafter the monthly payment due on the statements would be the monthly payment
negotiated by the DMP, and the account report as current to the credit bureaus.
It should be noted that this process does not eliminate the prior delinquencies
from the credit bureau reports. It merely gives a fresh start and an opportunity
for the client to begin building a positive credit history. Like all derogatory
credit information, the passage of time will lessen the impact of the negative
marks when credit scores are calculated.
Cautions Regarding Credit Counseling (Canada)
The Financial Consumer Agency of Canada (FCAC) advises Canadians to do their
homework about credit counseling services before entering into an agreement.
According to the Agency, consumers should shop around and compare services of
credit counseling bodies and take note of the different fee structures of for-profit
and not-for-profit credit counseling, as well as what services are offered for
those fees. Consumers considering entering into a DMP should also be aware that
an R7 credit rating will be entered in their credit report and that their credit
report will show that they used credit counseling, a notation that will remain
on the report for at least two to three years. Prospective lenders, employers
and landlords may view information in an individual's credit report, if the
application forms consumers sign grant them permission to do so. Source : Wikipedia