Understanding the Ins and Outs of Credit

Credit counseling is an option for individuals whose personal finances have gotten to the point where they have buried themselves financially, either through lack of financial discipline, or from external circumstances out of their control. A reputable credit counseling agency should be experienced in finance and be staffed by professionally trained credit counselors.

Government approved credit counseling agencies by law are non-profit companies, meaning that their primary concern is their mission to assist those in need rather than to make a profit. Not all credit counseling companies offer the same services and although are primarily non-profit, they do not charge the same fees. Be sure to ask what services they offer before deciding which agency to work with.

Quality credit counselors will offer the following services:

Consumer Credit Counseling

They should offer at least one, preferably more, counseling sessions in which they advice you regarding your specific financial situation and the steps you need to take to improve circumstance. Areas covered should include, but may not be limited to budgeting, money management, credit usage, home purchasing plans (if you do not own a home), and personal savings goals.

Consumer Finance Education

Classes and/or seminars to assist you in learning how to better manage your money and how to use credit wisely. This education should be beneficial, informative, and to the point. It should make a difference in your financial future, if you apply the knowledge learned from the instruction.

Debt Management and 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 them who in turn then makes payments on your behalf to your creditors.

A quality credit counselor will first notify your creditors of your participation in their Debt Management Plan and then negotiate with them for lower, if not waived fees, lower monthly payments, lower interest rates and account re-aging. (An agreement reached where the account longer is listed as delinquent on your credit report.

If your circumstance is due to external issues (such as a sudden job loss) debt management and discipline may not be your problem and a debt management plan may not be in your best interest so it is important that you find a credit counselor that will take the time to determine if this is a viable option for you to take.

Credit counseling has no immediate affect on your credit score whatsoever. The affect shows up after your debt is cleared and you have reestablished credit. However, your creditors are likely to indicate your participation in a debt management program in your credit file.

Whether your participation in a Debt Management Program will help your immediate ability to borrow money depends largely on who it is evaluating your credit. Some lenders will not work with consumers that are under debt management programs. Others lenders, on the other hand, view your participation in a debt management program as a sign of a serious commitment and willingness to meet and maintain your obligations.

Credit counselors will usually try to make a plan that will bring you to a debt-free status in 2 to 4 years. Credit counseling agencies also get funds from donations made by the public as well as contributions from other organizations. As a result, your out of pocket expense for counseling should be no more than $50 per month.

Another important aspect for you to be aware of is because they benefit when you pay your debt, credit counselors that offer Debt Management Planning receive additional funds directly from the lenders involved. This is a normal and accepted practice in the industry, being aware of this fact will assist you in your evaluation process when choosing a credit counselor. Counselors whose primary source of income comes from the lenders should cause you to ask yourself who are they really working for, you or the lender.

A sign that a credit counselor may be more interested in the kickbacks from creditors than your personal situation is that they only offer the Debt Management Program and the consumer education aspect is not made available, or is only offered through dvds and printed materials and the personal training, in groups or one on one, is not part of the deal.

Although there are several excellent credit counseling organizations out there, you should be aware that with the tremendous need and growth in the credit counseling industry, there has been an emergence of numerous firms calling themselves credit counselors when they are, and act as nothing more than an extension of the debt collection aspect of the credit industry itself.

In August 2006, President Bush signed the Pension Protection Act of 2006 which includes new laws that target unethical credit counselors. This is excellent news for you. Armed with the very specific knowledge brought forth in the Act, your awareness of exactly what a non-profit credit counseling agency should or should not do under the new laws places you in a position to locate a quality credit counseling organization, one that has your best interest at heart.