Credit Counseling

Credit counseling begins with a meeting with a credit counselor. The debtor and counselor sit down together, analyze the financial situation and devise a way to deal with the debt. From there, if it is needed, the counselor works with the debtor to create a debt management plan.

The goal of the debt management plan is to repay creditors at a reduced cost and over a shorter term. The credit counselor negotiates with creditors to reduce fees and interest, thereby lowering the monthly payment. The counselor also tries to cut a shorter payback period, from an average of around 20 years to a range of three to six years. This reduces the interest tacked on to the final overall amount paid.   

Procedurally, the debtor handles several different debts by creating a single debt-paying account with the credit counseling agency. Each month, the debtor makes a single payment into the account, and the credit counseling agency then distributes that money to the creditors.

On the downside, some credit counseling agencies, in particular non-profit ones, have been seen traditionally as taking too great a percentage of their revenues from the credit industry, thereby practically becoming a collection wing for the credit card companies. Congress has also warned that some credit counseling agencies have charged extremely high fees and provided poor service. The National Foundation on Credit Counseling recommends checking the accreditation or national affiliation of any credit counseling agency that you might choose, along with other measures.