Credit Counseling Agencies

Submitted by jvholloman on Wed, 04/22/2009 - 05:20

A popular way to try and tame out of control consumer debt, credit counseling can mean different things to different people. I thought I'd use this post to explain what it is and what it can and cannot do for you.

What It Is

Credit counseling is more than just meeting with someone who advises you on how to handle your credit and credit problems. Most credit counseling agencies actually negotiate with creditors on your behalf and even handle making the payments to the your individual creditors, after they collect the money from you.

Reputable credit counseling agencies have relationships with many local, regional, and national lenders. These relationships allow them to work with the lenders in ways most individuals wouldn't be able to and secure concessions from the lenders to allow you to be able to pay off your debt without filing bankruptcy or defaulting on your credit obligations.

Typically, you will meet with a counselor who will go over your debts, expenses and income. The counselor will aid you in setting a budget and determining how much money you can use to service debt on a monthly basis.

Then they start working with your creditors to stop late fees and in many cases can get your interest rate lowered substantially. In some cases they can even get the lender to cease applying interest to the account.

Each lender is paid according to their percentage of your overall debt. That means that you can't decide to pay off your smallest debt, or even largest, ahead of the others. If you owe $1000 to a lender and come into some cash, that $1000 would be applied to all your creditors and not just one. The good news is that most people can pay off their debts within five years using a legitimate credit counselor.

The agency will collect the monthly payment from you and distribute it to your various creditors for you. They are usually fairly strict about how many times you can be late with a payment before you are kicked out of the program.

What It Can't Do

  • It can't make your debt disappear. Contrary to what some companies may tell you, legitimate credit counseling agencies may be able to reduce interest and late fees, but they cannot wipe out debt. At the very least, you will still need to pay back the amount you owe when you start credit counseling.
  • It can't magically improve your credit rating. Ruining your credit rating took a little time. Improving it will take a lot longer. Lenders don't usually remove derogatory information from your credit record. In fact, the process is frowned upon in the industry because it masks the risk potential lenders face if your payment history is fixed.

What It Can Do

  • It can stop harassment. Once you begin credit counseling the phone calls and letters should stop coming. While not a financial benefit, this mental benefit can be as freeing as actually paying off a creditor.
  • It can help improve your credit score. Most creditors will not stop reporting your account as delinquent right away. Most will wait a month or two to make sure you are going to fulfill your end of the new bargain. And most will likely start reporting your account as being paid on time and not delinquent even if you are not totally caught up. Typically you will need to make a certain number of payments on time, between four and twelve are the norm. This will help your credit score to start climbing as more and more of your accounts are removed from delinquent status and as you accumulate several months of paid on time postings. Only with several years of on time payments will your credit score truly recover, but counseling will help jump start the process.

    • Next time we'll take a look at what to look for in a credit counseling agency and what to avoid.