How Consumer Credit Counseling Works

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Introduction to How Consumer Credit Counseling Works

Your phone rings off the hook -- but unfortunately, it is not your friends wanting to go out or your family asking how you are doing. Instead, your phone line is tied up by creditors and credit agencies demanding their money.

Money may be the last thing you want to think about -- but avoiding the issue could mean falling deeper into debt. Fortunately, there are options for reducing and managing your debt, and one of these is consumer credit counseling.

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Personal debt is reaching record highs, and personal savings is reaching all-time lows. Yet consumer spending accounts for two-thirds of the $11 trillion U.S. economy. Consumer credit counseling can help people find relief.
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Consumer credit counseling helps to rebuild and reestablish your credit by creating a debt repayment plan that you can afford. It is not a quick fix, and it will not give you perfect credit instantly, but it can go a long way in repairing your credit and giving you financial freedom.

Credit counseling agencies usually work on a three-part program:

First, they will assess your current financial conditions to see how badly you are in debt. Not all situations will best benefit from a consumer credit counseling service.
If your situation is applicable for consumer credit counseling, the agency will help establish a restructuring and repayment of your debt to the credit card companies.
The counselor will give you credit education [source: CreditPage]. This may be the most important step, because learning about credit and finances will help you keep your newfound financial freedom for the rest of your life.

Debt Management Plans

Debt Management Plans, or DMPs, are often a good solution, but not the right option for everyone. At Credit Counseling Northwest, for example, only 19 percent of their customers used a DMP as their best option [source: Weisbaum]. Less-scrupulous agencies sometimes use a DMP as their catch-all solution to get consumers' money. If a consumer credit counseling service offers DMPs as its only option, seek another agency.

Read on to find out how consumer credit counselors will assist you using their three-step plan.

How Do Consumer Credit Counselors Help Me?

Credit Score Quiz

Paying off debt through consumer counseling and a debt repayment plan will raise your credit score. But do you really know how your score is calculated? Take our Credit Score Quiz and find out.

Consumer credit counseling can help people who are having trouble paying bills learn to manage money and reduce debt. However, if people are very far in debt, consumer credit counseling may not enable them to make enough progress to get out of debt, making bankruptcy a possible option. The best candidates for credit counseling:

Cannot make the minimum payments on their credit cards
Are always late paying at least one of their bills
Are being contacted by collection agencies and their creditors
Have already tried to work out a payment plan with their creditors, but the creditors have not accepted it [source: Weston]

If you choose consumer credit counseling, the agency will first help you by examining your finances. Trained counselors will help you work out a plan after looking at your income and your expenses. They will give you ideas on how to pay back what you owe by cutting back expenses or showing you how to better manage your money.

The second step, if you need it, is debt restructuring and repayment. The credit counseling agency will contact your creditors and try to negotiate a new payment plan that you can afford. The creditors might accept a smaller monthly payment, happier to get something than nothing at all if you were to go into bankruptcy, or they may lower the interest on your remaining debt. Once the payment plan has been settled by the counselors and the creditors, you will only have to make one payment per month to the credit counseling agency. They will give your money to the various creditors, and the hassling calls should stop.

Photo by John Nordell/The Christian Science Monitor via Getty Images
Credit advisor Nicole Atchinson of Consumer Credit Counseling Service helps Worldy Armand on Aug. 17, 2004, manage his debt in Boston, Mass. Armand is straightening out his financial affairs as he prepares for school.

Lastly, the consumer credit counseling agency will offer credit education. It may be tempting to skip this step because you are no longer being hounded by creditors, but stick to it. Financial education is the key to staying out of debt. Credit counselors will teach you how to manage your income and expenses. They will also show you how to use credit wisely and create a future financial plan [source: CreditPage].

Even if you do not need consumer credit counseling, it may be beneficial to get more financial education. Many credit counseling firms host various financial education courses, including budgeting and debt management. You can never have too much knowledge.

Fees

Many credit counseling ervices are not-for-profit, and usually cost little to nothing. There may be a small setup fee and monthly fees to cover expenses, but they should be no more than $10 to $50. Some may cost nothing at all. If a consumer credit counseling agency tries to charge you high fees, look elsewhere.

By correctly following a consumer credit counseling plan, you should be free from debt in about two to four years. It may be a slow process that takes discipline, but you will feel much better knowing you are in charge of your finances. And the next time your phone rings, it will be someone you want to hear from, instead of a creditor or collection agency.

For more information about credit card debt and your options, see the links on the next page.

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