Credit Counseling Process Explained

credit counselling

Credit counseling is defined as ‘a process that is used to help with debt settlement through budgeting, education and use of various tools where the goal is to reduce & eliminate debt’. In few countries, it’s an obligatory process before anyone filing for bankruptcy. There are different regulations in different countries for this. Some counseling agencies are non-profit, while some companies charge very large amount of money as fees. is the best destination to seek advice on credit counseling.

There are three steps in credit counseling. The first step is to assess the existing health status of the credit. The second step would be to draw a plan that is personalized on a resolution which also helps to improve the credit score. The final step would be to execute the plan, to evaluate it on a regular basis. Credit counselor’s first task would be to understand debtor’s financial situation. Therefore, it is imperative that there shouldn’t be any hidden facts among the counselor and debtor. In many cases, there are collective loan defaults, low credit values and zero sources of income. At such times, it is the job of the counselor to make the debtor understand the scenario and to give confidence.

The next step of the counselor must be to make a plan to settle, negotiate and repay the debt. The counselor may also negotiate with the creditors upon the debtor’s authorization. They could try and waiver the interest amount or could negotiate for an extension of duration. The counselor could also give some suggestions for the debtor on the rules, management techniques and regulations so that they can be cautious in future.

The final task of the counselor would be to make a Debt Management Plan- DMP for the debtor. In this plan, the debtor hands over the financial responsibilities to their counseling agency and pay money to them, this in turn is distributed to the lenders by the agency. While this might be an easy way, this plan costs a huge amount of money and also involves sharing personal details with the agency.

The credit score will not be affected by the counseling session itself; but, taking up DMP might have a negative effect on the credit score in a short run. This is because DMP involves closing debt accounts one by one, or a partial payment might negatively affect the credit score. Finally, if at some point they stop paying on the debtor’s behalf, it might damage the credit history even more. But on the other hand, a debtor requiring DMP means that his/her credit score is already very bad; so DMP might close all debts after a long run helps closing bad debts, providing a fresh start.

Credit counseling is very important if there is massive debt and the debtor does not have sufficient sources of income to close all the debts. Selecting the counseling agency carefully is also imperative. Agencies that have a good reputation and authorization must be selected. Some agencies demand a large sum of money or personal details; such agencies should be avoided.

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