Each year thousands of Americans seek professional credit counseling as a solution to consumer debt management. Through no fault of their own, many people struggle under the weight of mounting credit card debt and delinquent loan payments, compounded with late fees and penalties, with no end in sight. Due to extreme circumstances such as, sudden unemployment, divorce, or accident and illness, many consumers simply can’t keep up with all of the financial demands life requires.
What Is Credit Counseling?
Credit counseling combines the knowledge of experienced financial professionals with proven debt management strategies to guide consumers toward good financial decisions. Credit counseling services help consumers take control of overspending, high credit card debt, late monthly payments, and poor credit ratings, usa.gov. While credit counselors are often trained through individual counseling organizations, the National Foundation for Credit Counseling, NFCC certifies those who work in the nonprofit sector.
Professionals work with couples or individuals to create a budget, a workable repayment plan for existing debt, and debt consolidation if necessary. Trained counselors assist consumers by offering tailored advice and plans that target individual financial situations. Counselors analyze the existing budget and help develop effective repayment strategies.
Creating A Budget
Credit counselors will work with you to create a budget tailored specifically to your needs. Counselors will consider all of your expenses including household expenditures such as utilities, food, transportation, and insurances.
They will closely examine your loan and credit card payments, and the amount you spend on recreation and entertainment as well. Based on your personal income, credit counseling can help you explore expenses that can be reduced or combined and provide you with a workable budget that not only saves you money but creates opportunities to pay off creditors more quickly.
Depending on your particular financial circumstances your credit counselor may pursue credit card consolidation or total debt consolidation. Debt consolidation, also known as credit consolidation combines the balances of high interest loans or credit cards into one low interest loan.
This allows you to save money in interest and more easily manage your finances with one monthly payment that is lower than your previous payments combined. Debt consolidation companies may also work to secure a fixed interest rate for existing loans or credit cards that carry variable rate terms. New loans can be set up as either secured or unsecured agreements.
Many banks and credit unions offer low interest home equity loans that can be used to consolidate debt. The advantage to consolidating debt through the use of home equity is two-fold. Because the new loan is “secured” by the equity in the home, the interest rate on the loan will be lower than that of an unsecured loan.
In this way, the lender takes much less of a financial risk because of the ability to foreclose on the home if the borrower defaults. Home equity loans also currently allow taxpayers to deduct any interest paid on their yearly tax return.
For many homeowners, debt consolidation is the best debt management solution available. If the consumer is at risk for bankruptcy however, it is important for the lender to ensure that certain debt may be included in the consolidation loan.
Exploring Debt Payoff Strategies
There are several strategies used in consumer credit counseling to help pay off existing debt. While there are many different ways to accomplish this, many people choose one of two basic methods.
Smallest Balance First – This debt payoff strategy is also referred to as the “snowball” method. This entails choosing the debt with the smallest balance first and concentrating on paying this off. While paying down on the smallest balance, the consumer makes the minimum monthly payment for each of the other debts. Once the first debt is paid off, the consumer then moves on to pay off the debt with the next lowest balance. This method allows consumers early success as the process picks up momentum.
Highest Interest Rate First – This debt payment strategy involves paying off the loan or the credit card with the highest interest rate first. The principle behind this method is to end up paying the least amount of interest overall. Consumers continue to make the minimum monthly payment on each of the other accounts, but apply all available income to the balance of the debt with the highest interest. This method allows for maximum savings in the long run which can be applied to pay off other debt sooner.
Debt Management Plan
Credit counseling sometimes includes the need for a debt management plan. The credit counselor helps consumers by working with lenders to establish better, more affordable terms for the borrower. Many times credit card companies are willing to lower interest rates to create a lower monthly payment for consumers who are delinquent in their minimum payments.
With a debt management plan creditors often close the customer’s existing credit account and open a new one with the new payment structure in place. While a consumer is generally not allowed to add new charges to the reconfigured credit account, the debt management plan allows for the payoff of the debt much sooner.
“Curing” or “re-aging” of a credit account occurs when the creditor allows the consumer to make a series of on-time payments on a delinquent account. This resets the account to a status of “current”. While a credit report will still reflect past delinquencies on the loan or credit card, curing or re-aging will ensure a fresh start for the consumer.
What To Bring To The Credit Counseling Session
The consumer credit counseling service will usually notify you with the documents needed for your initial consultation. These may include:
- Recent paystubs and records of any additional income
- Loan and credit card statements
- Bank statements
- Utility bills
- Auto and homeowner’s insurance statements
- An estimate of monthly food bills
- An estimate of fuel costs
- An estimate of monthly recreation/entertainment expenses
We know life isn’t always predictable. Difficulties arise that make it impossible to keep up with housing costs, loan payments and credit card bills. Fortunately credit-counseling services are available no matter what your financial circumstances are. Whether you need a debt consolidation loan, a personalized debt management plan, or simply a budget consultation, there are solutions for every situation.