For individuals facing financial challenges, debt counseling can offer a valuable service. Counselors can help educate consumers about financial matters such as money management or household budgets. They can also help reduce debt, as well as avoid bankruptcy or the loss of a home.
Debt and Credit Counseling
The first credit counseling agency was created back in 1951, when credit grantors formed the National Foundation for Credit Counseling. The NFCC was charged with promoting "financial literacy" in consumers, with the objective of reducing bankruptcies throughout the United States.
By 1993, the Association of Independent Consumer Credit Counseling Agencies, or AICCA, was created citing the need to develop standards of ethical conduct among credit counselors. The AICCA was the first true competitor to the NFCC, and there was a clear dividing line between the two agencies. While the NFCC believed that face-to-face interactions with the client was an important component of delivering services, the AICCA consisted of counselors which favored the delivering of debt management programs over the telephone.
Counseling versus Repair
Debt and / or credit counseling, is a disciplined process by which consumers are taught how to avoid incurring debt they cannot repay. Debt counseling is different than repair services, which often involves claims a company can restore credit in just a few short weeks or even days.The only practical action a counselor can take to clean up a credit report is to remove inaccuracies appearing in the credit history section. Restoring credit requires a historical pattern of paying bills on time; practices that go beyond this approach may be illegal. In fact, it is illegal for any agent to misrepresent the organization's services including:
- Making untrue statement to the client's credit reporting agency or creditors
- Advising consumers to change their identities
- Accepting payment in advance of fully performing services
Services Provided by Counselors
The types of services provided by credit counselors will vary, depending on their client's individual circumstances. A good counselor will have a multifaceted approach to solving debt problems, including:
- Referral Services: problems are sometimes a result of underlying family situations that need to be resolved before a financial situation can improve. A good counselor will get their client in touch with other social agencies that can help with these matters.
- Budgeting: individuals are often able to improve their situation simply by learning how to budget their money. Counselors will educate clients in the basics of home economics in addition to creating a budget.
- Debt Management Plans: counselors work jointly with clients to outline a plan for recovery. This is often referred to as a debt management plan, or DMP program, which deals with existing liabilities as well as staying debt-free in the future.
- Negotiation: depending on the individual circumstances, services could include working with creditors to create deferred payment arrangements.
- Debt Consolidation: as a final step, it may be necessary for the counselor agency to go beyond budgeting and negotiating with creditors. They may develop a plan to consolidate debt in a way that works for the client.
Studies conducted by Georgetown University's Credit Research Center showed that consumers who were recommended for a debt management plan by credit counselors, and chose to start payments, had a significantly lower incidence of bankruptcy. The creditworthiness of consumers who participated in debt management programs actually improved.
Good counselors will often help to minimize the current impact a poor payment history is having on a credit score. If they can solve a client's debt problems by creating a better household budget, there should be no material impact on a rating or score. There are four components that credit bureaus use to calculate a score, each of these is addressed as part of a comprehensive counseling plan: Payment History (paying bills on time), Outstanding Debt, Credit History (volume of information), and New Credit (recent applications for credit or loans).
Finding a Counseling Service
The seal of the National Foundation for Credit Counseling assures consumers the agency has met the high standards and ethical practices set forth by the NFCC. The counselors are certified and are trained to provide consumers with the help they need to realize long term financial strength. Many of these partner agencies offer free services, or charge nominal fees to cover operating costs.
Credit counseling agencies are able to offer their services for free due to the compensation agreements these agencies have with creditors. For example, a counseling agency is often compensated by the same creditors to whom the debt payment is made. This fee is sometimes referred to by the credit industry as "Fair Share," with compensation in the area of 5 to 15% of the debt amounts recovered by the counselor.
It is this fee structure that has led some to believe that credit counselors are acting as an extension of the creditor's collections group. Some experts also believe this free service arrangement opens the door to certain abuses.
For Profit versus Non Profit Counseling
Companies operating as non-profit counselors will have a 501(c) (3) form on file. This status typically appears on a website's "About" page. Making a decision between for-profit and non-profit debt counseling is not black and white. The growing use, or abuse, of credit cards is resulting in a sharp increase in the competition among those in the debt / credit counseling service industry.
Let's say a consumer manages to find a non-profit debt counselor from a reputable organization. This type of organization will likely depend on community volunteers that may, or may not, have a lot of experience in counseling. An individual may be fortunate and assigned a good counselor, or they could wind up with someone less experienced.
Compare the above situation versus hiring a for-profit counselor from a reputable business. There is a much greater chance the person assigned will be a trained professional. Sometimes, but not always, paying for service can be the less expensive option. That's why it's important to understand the counselor's qualifications before entering into any agreement.
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