Learn How Credit Counseling Can Help You Avoid Bankruptcy!
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Learn How Credit Counseling Can Help You Avoid Bankruptcy! |
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Credit counseling, also known as debt counselling is a process offering education to consumers about how to avoid incurring debts that cannot be repaid. This process is actually more debt counseling than a function of credit education.
Credit counseling often involves negotiating with creditors to establish a debt management plan (DMP) for a consumer. A DMP may help the debtor repay his or her debt by working out a repayment plan with the creditor. DMPs, set up by credit counselors, usually offer reduced payments, fees and interest rates to the client. Credit counselors refer to the terms dictated by the creditors to determine payments or interest reductions offered to consumers in a debt management plan.
After joining a debt management plan, the creditors will typically close the customer's accounts and restrict the accounts to future charges. The most common benefit of a DMP as advertised by most agencies is the consolidation of multiple monthly payments into one monthly payment, which is usually less than the sum of the individual payments previously paid by the customer. This is because credit cards banks will usually accept a lower monthly payment from a customer in a DMP than if the customer were paying the account on their own. Some DMPs advertise that payments can be cut by 50%, although a reduction of 10-20% is more common.
The second feature of a debt management plan is a reduction in interest rates charged by creditors. A customer with a defaulted credit card account will often be paying an interest rate approaching 30%. Upon joining a DMP, credit card banks sometimes lower the annual percentage rates charged to 5-10%, and a few eliminate interest altogether. This reduction in interest allows the counseling agencies to advertise that their customers will be debt free in periods of 3-6 years, rather than the 20+ years that it would take to pay off a large amount of debt at high interest rates.
A third benefit offered by credit counseling agencies is the process of bringing delinquent accounts current. This is often called "reaging" or "curing" an account. This usually occurs after making a series of on-time payments through the debt management program as a show of good faith and commitment to completion of the program. For example, a client with an account with a monthly payment of $50 which has not been paid in two months might be considered by the creditor to be 60 days past due. After joining the DMP and making three consecutive monthly payments, the creditor could reage the account to reflect a current status. Thereafter the monthly payment due on the statements would be the monthly payment negotiated by the DMP, and the account report as current to the credit bureaus. This process does not eliminate the prior delinquencies from the credit bureau reports. It merely gives a fresh start and an opportunity for the client to begin building a positive credit history. Like all derogatory credit information, the passage of time will lessen the impact of the negative marks when credit scores are calculated.
Many educational facilities have begun to incorporate credit practice into the curriculum. Schools have been incorporating the Charge Large Board Game. Players or students now learn and practice using credit paying-off in cash. The different level credit cards and upgrading system (in the Charge Large game) makes for an incentive for players to use their credit card and paying them off in full. It is said by 2011, the Charge Large Board Game will be in 70% of colleges practiced during orientation and in the classroom setting. In addition, by 2011, the Charge Large Board Game will be in 65% of high schools throughout Canada. Therefore, students receive credit counseling prior to receiving any form of credit.
Helping people deal with immediate debt problems is only part of the story for those involved in debt counseling. Counsellors equip people with the skills they need to manage their finances intelligently over time, and hopefully for the rest of their lives!
Debt repayment is only one important dimension of a debt counsellors work. In the face of the radical social change that has occurred where credit is used almost without thought, it is equally important that we all find and pursue every means to educate and inform young people and consumers about the fundamentals of personal financial management. Only by this means can a true financial balance be attained.
The Financial Consumer Agency of Canada (FCAC) advises Canadians to do their homework about credit counseling services before entering into an agreement. According to the Agency, consumers should shop around and compare services of credit counseling bodies and take note of the different fee structures of for-profit and not-for-profit credit counseling, as well as what services are offered for those fees. Consumers considering entering into a DMP should also be aware that an R7 credit rating will be entered in their credit report and that their credit report will show that they used credit counseling, a notation that will remain on the report for at least two to three years. Prospective lenders, employers and landlords may view information in an individual's credit report, if the application forms consumers sign grant them permission to do so.