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Credit Counseling

What Is Credit Counseling?

Credit counseling (aka consumer credit counseling services) is a service that provides you with financial education, advice and tools. Some people refer to a credit counseling agency as a debt management credit counseling company because debt relief comes in the form of debt management programs (DMP). There are non-profit consumer credit counseling agencies and for-profit consumer credit counseling services. Both provide the same basic services.

If you have just gotten a little behind on your payments and/or need some help reducing your interest rates, consumer credit counseling may be right for you. Credit counselors will develop a personalized finance plan to help you pay off your debts faster. Many credit counseling companies have agreements with credit card companies that allow for interest rate reductions as long as you stick to a pre-defined payment schedule.

Because you make a single payment to a consumer credit counseling service, and they in turn pay your creditors, some refer to credit counseling as credit counseling debt consolidation. Though it seems like your debt is consolidated, each account enrolled in a credit counseling service is still separate.

Whether you are looking at a for-profit or non-profit credit counseling service, be sure to do your research. Look for an accredited credit counseling service that is affiliated with a national body and check them out at the Better Business Bureau as well.

What Consumer Credit Counseling Can Do for You

Because of their relationships with credit card companies, consumer credit counseling services can not only help reduce your interest rates, they can stop collection activities altogether. Creditors have more faith they are going to get paid when a consumer credit counseling company is involved with an account.

Another advantage of credit counseling is that it doesn't affect your credit score. However, CCCS (Consumer Credit Counseling Service) or DMP (Debt Management Plan) will appear on your credit report and it may be harder to get credit in the future. Lastly, consumer credit counseling can reduce your monthly payments and consolidate them into a single payment made directly to the credit counseling company.

To review, both for-profit and non-profit consumer credit counseling services can:

  1. Reduce your minimum monthly payments
  2. Reduce your effective pay-off amount and shorten your pay-off period
  3. Stop collection activities
  4. Protect your credit score
  5. Consolidate your payments

Credit Counseling Debt Consolidation

Some credit counseling companies also offer debt consolidation services marketed as a Debt Management Plan (DMP). If a consumer credit counseling company signs you up for a DMP, you would begin making monthly payments to them and they, in turn, will distribute this money to your creditors.

The benefit of this credit counseling debt consolidation option is that you enjoy lowered interest rates and the convenience of one low monthly payment. However, unlike traditional debt consolidation services, your debt is still held by the individual creditors.

Credit counseling debt consolidation is better than traditional debt consolidation in that it is easier to qualify for. With traditional debt consolidation, you either have to have good credit to get an unsecured debt consolidation loan, or get a secured loan such as a home-equity line of credit.

The drawbacks to a credit counseling debt consolidation program is that it may be harder to obtain credit in the future and that some forms of debt can't be include in a DMP such as medical debt.

Credit Counseling Debt Relief

It is important to realize that a consumer credit counseling program doesn't offer any debt relief in the form of principal reduction—you will still pay back 100% of what you owe to your creditors. The debt relief a credit counseling program provides comes in the form of interest rate reduction and an accelerated pay-off period.

High interest rates make borrowing money expensive (and profitable for credit card companies). If you have fallen behind on your payments, you interest rates have likely skyrocketed! A credit counseling agency usually has rate-reduction schedules with major creditors allowing them to reduce your interest rates and monthly minimum paymeduce your interest rates and monthly minimum payments.

Although your principal isn't being reduced, lower interest rates means you can pay off your debt faster with the same amount of money. For those who just need a little help managing their expenses and meeting their monthly payments, consumer credit counseling is a viable option.

Debt Management Credit Counseling

A debt management credit counseling service works with you to see how you can repay your creditors. After going over your income, expenses and making a budget, a debt management credit counseling service will work directly with your creditors to lower your interest rates and payments to an affordable level.

An added benefit of working with a debt management credit counseling company is that they handle all correspondence with your creditors for you and distribute payments to your creditors. Collection activities stop, your credit score is preserved and you pay your creditors on a schedule that works for you.

If you have relatively high interest rates and just need a little help making your monthly payments, debt management credit counseling may be right for you. Just fill out the form to the left for a free consultation with a certified consumer credit counselor.