Credit counseling

From ArticleWorld

The term Credit counseling is a process offering consumers an alternative about how to reduce credit debts that cannot be repaid within the original contractual agreements. This process is actually more of a debt agreement than it is any kind of any actual credit education or re-education. It usually involves some sort of negotiations, with the creditors, to work out a debt management plan. Debt management plans usually offer the consumer reduced payments, fees and interest rates.

History

Originally, credit counseling was intended to promote financial literacy and help consumers avoid bankruptcy. The first credit counseling agencies were created in 1951, in the United States, when credit grantors created The National Foundation for Credit Counseling. Now there are over 1,000 credit counseling organizations in the United States alone. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made credit counseling a requirement for all consumer debtors filing for bankruptcy.

Criticism

By the early 1990’s, antitrust issues with certain credit counseling organizations were so significant, it led to widespread criticism of the entire industry. A credit counseling agency generally receives the majority of its compensation from the creditors to whom the debt payments are distributed. This relationship has led many to believe that credit counseling agencies are merely a collections department of the creditors. This fee income, known as Fair Share, is made up of contributions from the creditors that originally earned the agency approximately fifteen percent of the amount recovered. In recent years, that fee income has dwindled steadily, with contributions of four to ten percent being the most common.

Choosing a credit counselor

These are some of the questions to ask to find the best credit counselor for you:

• What services do you offer? - Look for an organization that offers a wide range of services, including budget counseling and debt management classes. Avoid any that insist upon a debt management plan as your only option before they spend a significant amount of time analyzing your situation.

• Are educational materials available for free? - Avoid credit counseling organizations that charge you for information.

• What are your fees? - Get a price quote in writing.

• Are you licensed to offer your services in my state?

• Are your counselors accredited by an outside organization? If so, by whom? If not, how are they trained? - Try to use an organization whose counselors are trained by an outside, non-affiliated party.