Credit Counseling Overview

Credit counseling is a service that educates and guides consumers that are buried in debt and who are trying to gain control of their finances. It is known in the United Kingdom as Debt counseling, is commonly a process that is used to help individual debtors with debt settlement through education, budgeting, and the use of a variety of tools with the goal to reduce and ultimately eliminate debt. It is designed to help consumers avoid bankruptcy and escape living paycheck-to-paycheck.

Credit counseling is most often done by Credit counseling agencies that are empowered by contract to act on behalf of the debtor to negotiate with creditors to resolve debt that is beyond a debtor’s ability to pay. Credit counselors offer advice on budgeting, managing money, and other basics of finance. Some of the agencies are non-profits that charge at no or non-fee rates, while others can be for-profit and include high fees. They assist people unsure of how to approach creditors about a settlement, or a payment plan and walk them through the process.

Overview

In the United States, the National Foundation for Credit Counseling was established in 1951. The modern practice is known as ‘‘credit counseling’’ was initiated by creditor banks and credit card companies during the mid-1960s to address the growing volume of personal bankruptcies.

Credit counseling organizations can advise you on your money and debts, help you with a budget, and offer money management workshops. Although there is a variation from country to country and even in regions within the country, consumer debt is primarily made up of home loans, credit card debt, and car loans. Credit counseling includes an array of services to address consumer debt that is not within the debtor’s ability to pay, such as education about credit personal finance, budgeting, and debt management. They provide tools that help people avoid past-due mortgage payments, maxed-out credit cards, and dormant savings accounts.

Here are some examples of what credit counselors might do:

  • Advise you on managing your money and debts
  • Help you develop a budget
  • Help you get a copy of your credit report and scores
  • May offer free educational materials and workshops
  • Organize a “debt management plan” to pay down your debts.

In addition to education, a popular credit counseling option is the ‘‘Debt management plan’’ (‘‘DMP’’, known in the United Kingdom as the Individual voluntary arrangement or “IVA”). Many counselors suggest Debt Management Plans (DMP) as a solution, while others may point you to debt consolidation, debt settlement, or bankruptcy. In order to initiate a DMP, a consumer would authorize the credit counselor to contact each of the consumer’s unsecured creditors and negotiate with each creditor to lower the consumer’s monthly payment amount, to lower the interest rate, and to waive any outstanding late fees. Nonprofit credit counseling agencies offer a variety of services, including general personal finance advice, homeownership counseling, and more. The debt was then ‘‘consolidated’’ into a single payment. Your credit counselor can provide the bankruptcy credit counseling session that is mandated by the Department of Justice before filing for bankruptcy.