How Can Credit Counseling Offer Debt Relief
Who Needs Consumer Debt Management for Credit Card Debt Help
Sep 29, 2009
As the recession drags on and a record number of Americans fall deeper in debt, the demand for consumer credit counseling and debt management services has increased. As a result, advertisements offering these debt help services seem to be every where these days. But with all the debt help options out there clamouring for the debtor's attention, one can easily get confused. How does credit counseling differ from other debt management services? Moreover, what kind of consumer and which kinds of situations are credit counseling services best suited for?
How Does Consumer Credit Counseling Work?
Consumer credit counseling services basically help debtors organize their finances with the goal being to pay off the full amount of money owed to creditors. Consumers who opt for a credit counseling program will generally begin the process by discussing the details of their financial situation with a credit counselor. In return, consumers receive a long-term financial plan for paying off all outstanding debt. Each month the credit counseling service receives the consumer's money and then gives it out to the various creditors. To make the process easier on the debtor, many counseling services will also try to negotiate lower interest rates with credit card companies and other lenders.
Credit counseling services generally earn about 15% of what they are able to collect for their client's creditors, and these fees are paid by the creditors themselves. So, for example, if a consumer is sending in $1500 per month, the credit counseling service will collect $225 per month in "commissions" from creditors.
How Does Credit Counseling Differ From Debt Consolidation or Debt Settlements?
The biggest difference between consumer credit counseling and debt consolidation or debt settlements is the affect it has on the consumer's credit rating. Debt settlement services and many debt consolidation companies assist indebted consumers by negotiating with creditors for big reductions in the amount owed in exchange for lump-sum settlements. Though it may sound like a great deal, especially for those who cannot afford to fully repay all their unsecured debts and are trying to avoid bankruptcy, it will definitely tarnish a person's credit rating.
Credit counseling, on the other hand, will leave a consumer's credit score largely intact. This is due to the fact that the consumer is agreeing to fully repay outstanding debts (minus any reductions in interest payments).
Who Needs Consumer Credit Counseling?
The ideal candidate for credit counseling will be the debtor for whom the following statements apply:
- The debtor has a history of good to fair credit.
- The debtor is still earning an income and can cover most of his or her expenses.
- The debtor has several unsecured debts that carry high interest rates, such as credit card bills.
- The debtor is looking for advice and assistance on creating and sticking to a budget.
- The debtor does not have the time, know-how, nor the desire to negotiate with lenders directly and is looking for a third party to represent personal interests.
In short, consumers in search of debt help in the form of general debt management have a lot to gain by enrolling in a certified credit counseling program. But this form of debt help will only be effective for a specific group of consumers.
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