Credit Counseling

Credit counseling is a method of educating people about how to avoid getting mired into debts and to help them repay their debts. This is usually part of a debt management plan offered to individuals who have incurred a variety of huge debts and are finding it very difficult to repay all of them.

These debt management plans often help the individual repay the debt by working out a debt repayment plan with all the various creditors of the individual. In return for these services, the credit counseling agency charges a fee from the creditors, which can range from 4 per cent to 10 per cent of the amount collected.

Credit Counseling: History

The very first credit counseling agency was created in 1951 in the United States of America with the formation of The National Foundation For Credit Counseling (NFCC). They stated that their objective was to promote financial awareness and help individuals avoid bankruptcy. However, they do not serve as collection agents for the creditors.

By the 1960s a variety of small and large, local credit counseling agencies had sprung up all over the country.

In 1993, the Association of Independent Consumer Credit Counseling Agencies (AICCCA) was formed to make standards of ethical practice within these counseling agencies.

Another organization called the American Association of Debt Management Organizations (AADMO) was also formed. This association is a trade organization.

Soon enough, laws were passed which made credit counseling compulsory for debtors filing for bankruptcy proceedings.

Credit counseling is a growing industry in several countries including UK and parts of Europe.

Debt Management: How it Works and Advantages of Credit Counseling

Debt management is a very effective method of helping individuals deeply in debt to repay these debts and get back on track with their credit history and credit rating.

What happens is that the credit counseling agency talks to the various creditors of the individual and takes over the debts of the individual. The debts of the individual can now be consolidated into one single debt. This reduces the total amount of payments which the individual has to make. Usually, there is a reduction of about 10 to 20 per cent of the outgoing amount for the individual.

Another thing that happens is that the rate of interest paid on the debts is reduced considerably for the individual. Since the debt management plan ensures that the debts are consolidated, the credit card companies can either stop the card or reduce the interest rate, or even stop charging interest altogether.

The next advantage is that the credit rating of the individual is given a fresh start via the re-aging process. This happens after the individual ends up making at least 3 payments on time to the credit counseling agency. Although these details are not really erased from the credit report of the individual, the fact that he has now begun re-working on his creditworthiness makes a difference. It is only with the passage of time that these remarks on the credit report will get reduce in their intensity for the individual.

Credit Counseling Industry: Criticism

The credit counseling industry has often been targeted with criticism that they front for the creditors and act as their collection agents. While the credit counseling companies state that this is not true, there are several credit counseling agencies which do have un-ethical standards and modes of practice combined with poor customer service.

Criticism has also been directed towards the ‘fees’ that the credit counseling agencies charge from the creditors.

Another criticism is regarding the credit history. Even if an individual decides to take on a debt management plan to effectively plan a debt repayment plan, without being on the verge of bankruptcy, just participating in one such plan can often reduce his credit rating. This often irks many people who may take up a debt management plan to simply consolidate their debts and make a single payment out of their bank accounts to repay their various debts.

However, credit counseling and debt management have, by and large, proved to be an effective and beneficial service for several individuals who are financially confused and land up in debts.