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What is credit counseling?
Credit counseling is an option for individuals whose personal
finances have gotten out of control. Some argue that credit counseling is better than
bankruptcy but, depending upon your circumstances, this may or may not be true.
A reputable credit counseling agency should be staffed by professionally trained
counselors that will talk with you about your entire financial situation before
recommending a course of action.
Credit counseling companies are companies
whose primary goal is to help consumers with their debt issues. Ideally
credit counseling companies are non-profit companies, meaning that their primary
concern is their mission to make a difference rather than make a profit.
Not all
consumer credit counseling companies offer the same services, so be sure to ask
what services are offered before deciding which credit counselor to work with.
A good credit counselor will offer ALL of the following three services.
- Consumer Counseling - One or more counseling sessions in which you are given
advice regarding your financial situation and what you can do to improve it.
Topics covered could include budgeting, money management, credit
usage, home purchasing plans and saving goals.
- Consumer Education - Classes and/or seminars to help you, the
consumer, learn how to manage your money and use credit wisely. This
should be more than an information CD, DVD or pamphlet. It should be
beneficial and informative to the point that it will make a difference if you
applied the knowledge learned.
- Debt Management Plans (also known as debt consolidation plans) -
With a Debt Management Plan, a credit counselor basically takes over the
maintenance of your unsecured credit accounts. The credit counselor will effectively
consolidate your debt allowing you to send one monthly payment to the credit
counseling agency who will then make payments on your behalf to your
creditors. The first thing a good credit counselor will do is notify
your creditors of your participation in their Debt Management Plan and
negotiate with them for lower or waived fees, lower monthly payments, lower
interest rates and/or a "re-aging" of your account so that it no longer shows
as delinquent on your credit report. Debt Management Plans are not for
everybody so it is
important that you find a credit counselor that will take the time to
determine if this is a good option for you.
How will credit counseling affect my FICO credit score?
Credit counseling is not taken into consideration when computing your FICO
credit score. In fact, credit counseling has no affect on your credit score
whatsoever. However, if you enroll in a Debt Management Program, your creditors are likely to
note in your credit file that your account is under a debt management or debt consolidation program.
The affects of this depend largely on who is evaluating your credit. Some lenders
will not work with consumers that are under debt consolidation programs while
other lenders view debt consolidation as a sign of your commitment and
willingness to pay your obligations.
How long will credit counseling it take?
Everyone's situation is different but credit counselors will usually try to make
a plan that will see you debt-free in 2 to 4 years.
How much does credit counseling cost?
The fees for credit counseling should be $50 per month or less. Credit
counseling agencies also get funds from donations made by the public as well as
contributions from other organizations. Additionally, since creditors benefit when debtors pay their bills, credit counselors that offer
Debt Management Planning also receive funds in the form of kickbacks from the creditors involved.
Knowing this in advance may make you wonder if you can trust that a credit
counselor is working for you and not the creditors. You are right to be
concerned but rest assured that such kickbacks are a normal and acceptable part
of the credit counseling industry so long as they don't make up the majority of
the credit counselors income.
Be especially careful of businesses that call themselves credit counselors
yet offer nothing more than Debt Management Plans. This may be a sign that
they are not interested in anything more than the kickbacks from creditors.
This is not to say that there are not excellent credit counselors out there.
There are. The point is just to emphasize that you must be careful. When you just need
credit help, the last thing you need is to be taken advantage of.
What is being done to keep consumers safe from unethical credit
counselors?
In August 2006, President Bush signed the Pension Protection Act of 2006 which
includes new laws that make it harder for unethical credit counselors to stay in
business - or at least harder to operate under the guise of being a non-profit
company.
This is excellent news for you because now you can start your search for a
reputable credit counselor armed with very specific knowledge of what non-profit credit
counseling agencies should and should not do under the new laws. Here are
the highlights:
- Credit counseling organizations* must provide services tailored to
your specific needs and
circumstances. The credit counselor must give you
all your financial options and explain the consequences of a Debt
Management Plan. No longer will consumers be given a quick 20-minute
presentation and offered the same solution as everyone else.
Credit counselors now have to take into consideration your individual
needs and suggest solutions that meet those needs.
- Credit counseling organizations* may not make
interest or fee bearing loans to you. Nor are they allowed to negotiate a loan
with someone else on your behalf. This new requirement draws a
clear line between counselors and lenders. You go to a credit counselor for credit help, not a
loan. If they offer no interest, no fee loans, then THAT is a
different story and is allowed under the new law.
- Credit counseling organizations* may charge you
to improve your credit record, credit history or credit rating.
Such services may be offered by credit counselors but only as a benefit
of their credit counseling services - not as a service in and of itself.
Accordingly, the credit counselor must not charge a separately stated
fee for such services.
- Credit counseling organizations* may not refuse services based on
your inability to pay. Basically, if you need credit help, and you
cannot afford to pay - they cannot turn you away. Also, you cannot
be turned away if you are not eligible for enrollment in a Debt
Management Plan or if you are unwilling to participate in a Debt
Management Plan.
- Credit counseling organizations*, except where allowed by state law,
must not charge fees based
on a percentage of your debt, your Debt Management Plan payments or of
your
projected or actual savings from enrolling in a Debt Management Plan.
The fees must be reasonable and must be set by an established fee policy
and, as stated above, must be waived if you cannot afford to pay.
- Credit counseling organizations** credit counseling organizations must not solicit contributions from consumers during initial
counseling session or while receiving services. Typically, people
seeking credit help, are at their most vulnerable point when they
finally reach out to a credit counseling company. That is not the
ideal time for you to have to consider making contributions to the credit
counselor - or any other charitable organization for that matter.
This portion of the new law will help ensure that those needing credit
help are not pressured into making contributions or mislead into
thinking that they must make a contribution in order to receive
services.
- Credit counseling organizations** must not receive more than 50 percent of revenue from creditors.
As mentioned before, credit counselors that offer Debt Management
Planning receive funds in the form of kickbacks from the creditors
involved. Limiting these kickbacks to 50 percent or less makes
sure that a credit counselor is not working more for the creditors than
they are for you. Credit counselors already in existence when this
law was passed (8-17-2006) have a few tax years to step this figure down
to 50 percent.
* This requirement applies to credit counseling organizations seeking
exemption from tax under section 501(c)(3) or 501(c)(4).
** This requirement applies to credit counseling organizations seeking
exemption from tax under section 501(c)(3).
To view the entire section of the Pension Protection Act of 2006 pertaining
to credit counseling agencies:
Click Here
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