Article by Margarette Jones
Many Americans seek help with debt. Debt can be crippling to the financial life of many people, so it is important to deal with the situation. One method that people seek help with debt is to pursue credit counseling, also referred to as a debt management plan. Credit guidance is definitely an option that people in debt should explore. However, it is a good idea to review the credit guidelines process before deciding if it is the right fit. Here are some frequently asked questions about credit counseling that might help you make you decision.
How does it work?
The program works by sending in a monthly payment to the credit counseling company. The company than dispenses that payment among your creditors. Depending on the amount of debt you owe, the program might last several years. Credit counseling companies can help negotiate reduced interest rates, which will help you save money. Also, the monthly payment is designed to fit your budget.
How does the process work?
The credit guidelines process begins with a consultation with a credit counselor. They will review your income, debt, and expenses. With that information, they will determine a monthly payment. They will then send proposals to your creditors. Once the creditors approve the plan, you will continue to send in monthly payments.
What are the costs?
Many credit advising companies are non-profit, but that doesn’t mean you don’t pay fees. Some credit advising companies have enrollment fees while others only charge a monthly fee. The fees are usually low and designed to cover overhead costs. You should never have to pay for a consultation. Also, you want to avoid credit counseling companies that take your first payment as a fee.
Are they non-profit?
The only credit advising companies that are non-profit are those that tax exempt status in the United States. Even these companies charge maintenance fees though. Many credit advising companies lost their tax exempt status after the IRS found that they were profiting from debt management plans.
Are any credit counseling companies sanctioned by the government?
No, the government does not sanction credit counseling companies. The only relationship between them and the government is related to taxes. The government has laws that require some form of credit advice before filing for bankruptcy, but they don’t recommend a particular company.
Does it have an impact on credit reports?
The credit impact depends on your current credit situation. In most cases, those in debt are often past due on accounts. Credit guidance can help you in this situation by bringing your accounts current. That can help the negative items start to age. If you have accounts in good standing, credit advice could have an adverse effect. The important thing to note is that credit counseling does not have any impact on your score. However, lenders may be able to see that you participated in a program. That could hurt your standing in their eyes.
What are the drawbacks?
The biggest drawback is that you won’t reduce the amount of debt you owe, which isn’t the case with something like debt settlement. In addition, it could also be a drawback if you can’t stick with the program. A missed payment could mean that creditors will boot you from the program and raise you interest rates. You should also be aware that some creditors may not participate in the program, which could lead to late fees and other penalties if you think otherwise.
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