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Credit Counseling FAQs
How does credit counseling work?
In credit counseling, clients pay one monthly payment to the debt counseling agency, who in turn distributes payments to the credit card companies. By using a credit counseling agency, consumers can lower their interest rates and reduce debt. The monthly payment is normally lower than your combined minimum payments and the overall savings can be large because of the interest rate reduction. The average program lasts 4 to 5 years. Credit counselors can also help you assess your financial picture to determine what problem if any exists with your budgeting, spending, or debt load.
What is the process?
You talk to a debt counselor and they give you an estimate of your monthly payment based on your debt amount and the creditors you owe. Once you sign up with a credit counseling agency, you start sending them your monthly payment and they send proposals to the credit card companies requesting a reduced interest rate. Although the likelihood of the creditor refusing an interest rate reduction is low, it is still possible that they will refuse to participate.
How much does it cost?
This varies from company to company, state to state (many states have regulations about the fees that credit counseling agencies can charge), and based on your individual debt situation (like how many creditors you have). Generally there is a set up fee of about $50 and a monthly fee of around $35. Some less scrupulous companies take your first monthly payment---those are the credit counselors that you’re best off avoiding. The fees are normally pretty low because the majority of the funding comes from your creditors, who give a percentage of the monthly payment back to the credit counseling company.
Aren’t credit counseling companies supposed to be non-profit?
Yes, some are non-profit, but others are not. Many companies that were once non-profit have recently lost their tax-exempt status after the IRS audited them and found they were primarily profit-driven. Even the non-profits charge set up and maintenance fees, although some waive them if your financial picture warrants this.
So are the non-profits government sanctioned? Are they neutral?
No, the non-profits are not government sanctioned---it is merely a tax issue. Some of the better non-profits are neutral and do try to assess your situation impartially. Others, however, still have a lot invested in getting consumers to enroll in their debt management plans (DMPs) because they need the fees.
How does credit counseling compare to Franklin Debt Relief’s debt reduction option?
It depends on what the consumer needs. If your main concern is having a dramatically lower monthly payment, reducing your debt fast, or saving the most money possible while avoiding bankruptcy, then debt settlement is probably your best option. If your main concern is ending creditor calls or enjoying a reduction in your interest rates, then credit counseling may be a better alternative. Either way, both debt negotiation and credit counseling offer the convenience of one monthly payment and are better alternatives to barely paying the minimums on high interest credit cards.
Will debt counseling affect my credit negatively?
This depends mainly on your credit at the time of enrollment. If you’re past due on your bills, bringing them current through credit counseling will improve your credit report. If you’re current, however, it may negatively affect your lendability in the eyes of any creditors. Many have gone so far as to compare credit counseling to Chapter 13 bankruptcy, where you follow a payment plan mandated by a federal court. According to Fair Isaac Corporation (FICO), the primary credit scoring agency, debt management plans do not affect your credit score. Your enrollment in a DMP may show up on your credit, however, so even though it does not affect your credit score, it may negatively affect your credit report in the eyes of lenders.
What are the negative aspects of debt counseling services?
Its main downsides as a debt relief solution is that it may not adequately lower your monthly payment. Sometimes your payment may even be higher than what you’re currently paying in minimums. Another negative is that if you miss even one payment, the credit card companies can jack your interest back up to the default rate, which can be as high as 32 percent. In light of how high the monthly payment can be, this can be problematic. Another downside of credit counseling is that a creditor can refuse to participate altogether. When this happens, you find out after you’ve made payments to the debt management company, so they’ll consider the debt past due, charging you late fees and higher interest (assuming you weren’t already delinquent).
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