Understanding Credit Counseling Services

Credit counseling services have several advantages and disadvantages. Because these services have a high success rate, many consumers solicit their help in managing their unsecured debt. Sadly, the average household has acquired an unsecured debt of approximately $10,000. This amount does not include automobile debt, student loans, etc. For the mot part, this debt is largely due to credit cards. High interest rates and late fees present an even bigger challenge – the inability to reduce the debt. Fortunately, there are services designed to help consumers eliminate high interest debt.

How Do Credit Counseling Services Work?

The ultimate goal of a credit counseling service is to help consumers reduce their unsecured debt. To accomplish this goal, each consumer is assigned an account representative. Their responsibility entails gathering as much information about the consumer's current credit history. For example, total amount of unsecured debt, unpaid utility bills, collection accounts, medical bills, etc. Once this information is received, the representative working for the credit counseling service will contact each creditor and negotiate a reduced interest rate, or the removal of interest.

Because credit counseling services have clout, and have already established a good working relationship with various creditors, the negotiation process is simple. In exchange for a lower interest rate, individuals using credit counseling must pay a monthly service fee.

Who Is Eligible for Credit Counseling?

Unfortunately, credit counseling is not designed for everyone. For example, individuals who earn a large salary, and have the disposable income to manage their own debts will not qualify. Furthermore, the majority of credit counseling services establish a minimum or maximum debt amount.

Debts Excluded from Credit Counseling

Be aware that credit counseling services only cover unsecured debts. These include credit card, bank loans, collection accounts, unpaid medical bills, unpaid utility bills, defaulted car loans, tax debts, student loans, etc. Unfortunately, credit counseling is not a solution for unpaid court fines and child support or alimony payments.

Although mortgage loans and automobile loans are excluded from credit counseling programs, if payments were past due, and the creditor has repossessed or foreclosed the property, the amount owed after auction or resell of the property may be included with the other debts.

Disadvantages of Credit Counseling

1. Fees. Monthly fees for signing with a credit counseling service may range from $40 to $200 a month. This is in addition to the monies paid to creditors. Furthermore, many deceitful counseling services charge several hidden fees, and are unable to produce significant results.
To avoid common scams, choose a non-profit service. Furthermore, compare services, fees, and request a no-obligation quote.

2. Four-Year Payment Plan. Because the majority of credit counseling services establish a four-year repayment plan, most people become impatient and stop using the service. Instead, they choose bankruptcy as an easy fix. Before filing bankruptcy, consider the risks. Which sounds more appealing – becoming debt free in four years, or permanently damaging your credit rating?

3. Future Credit. Be aware that participation in a credit counseling service may affect your ability to obtain future credit. Because of third-party assistance, it may appear as if you are unable to manage credit or debt. If possible, avoid applying for new credit while participating in credit counseling.