Credit counseling is designed to help you fix your finances and avoid bankruptcy and other last resorts. It can provide you with the advice you need to budget properly and get your finances back in order, and it can also help you when discussing payment plans and negotiating with creditors.
What is it?
Credit counseling is often conducted via a 1-on-1 session between an experienced counselor and a debtor. The former helps the latter with their financial situation, giving them advice and guidance and even directing them to the best solutions for their problems. Counseling can take place over a single 30 to 45 minute session, in which case it is often provided for free with a view to promoting connected programs, or it can take place over multiple sessions, in which case a fee may be charged.
Who is Credit Counseling For?
We all like to think that we have control over our finances and if anyone objects, be they a friend or even a spouse, it can trigger some heated arguments. But if we really were in control then we wouldn’t be in debt—we wouldn’t be spending frivolously, we wouldn’t have high interest loans and we definitely wouldn’t have more repayments than we can afford to make every month.
The most basic purpose of credit counseling is to force this realization, to help the debtor understand their situation and to give them some power over it. If any of the following rings true for you, then it might be time to get help:
- You have more debts than you can handle
- You find yourself getting stressed, angry, or upset over your finances
- Your financial situation dominates your life
- It feels like there is no escape, no light at the end of the tunnel
- You have multiple high-interest debts and are taking out more in order to pay them off
And that’s not all. If you have been managing your debts effectively but are about to undergo a major life event, such as a change of job, unemployment or a health problem, then you may need credit counseling just to prepare you for the change.
What Does it Entail?
During the course of a credit counseling session a debtor will be given the chance to discuss their issues, at which point the expert will advise on the best solution. In most cases, they will refer the debtor to a debt settlement, debt consolidation, or debt management program. In some cases they will not advise on any further action and will simply offer some budgeting tips and provide the assurances that the debtor needs regarding their situation.
A debt settlement is often undertaken by a specialized company, who finds a solution that both the debtor and their creditors can agree on. The creditor basically agrees to take a reduced amount in order to settle the debt straight away, wiping the slate clean in a way that benefits both parties, after which the debt settlement company will take their cut.
This process can be the quickest and best, as a skilled debt settlement company can save the debtor a small fortune. It’s the only way to reduce a sizable debt to something much more manageable, and in some cases a debt settlement plan can reduce a debt by half.
Debt consolidation is something that can be undertaken with help from an expert or by the debtors themselves. It involves taking out a substantial loan with a low interest rate and then using that loan to pay off all other debts. This will reduce all monthly payments to one single payment and if done right it can significantly reduce monthly outgoings.
A debt management plan is initiated by a non-profit company who works on behalf of the debtor to help clear their debts. They make it their goal to reduce the debts and to create a debt management plan that works for the benefit of the debtor.
They charge a fee, which is typically based on a set monthly amount and a percentage of the overall debt, but they are worth their weight in gold and typically save the debtor much more than they cost them. A debt management plan will allow the debtor to regain control of their debts and should ensure they are debt-free within 5 or 6 years.