How Credit Counselling Works

  by: John Mussi

Credit counselling services are becoming a major industry in the world today… both for-profit and non-profit organizations are showing up more and more frequently, offering to help individuals who have had credit problems in the past to get out of debt and get their lives back on track.

Many people are skeptical of these services, afraid that they might simply be scams designed to prey on those who need financial help; while there are undoubtedly similar scams out there, many credit counselling services that you'll find are actually legitimate and offer worthwhile services to those in need.

To avoid being taken advantage of you should investigate the service that you're considering with your local consumer advocate group, and consider the following to make sure that credit counselling is right for you.

Debt Management

One of the major services that consumer credit counselling organizations provide is assistance with debt management. Working with the individual who needs help, the credit counselling organization examines their various debts and tries to help them find the best way to overcome their debts in the shortest amount of time.

Often they will be able to find options for individuals that the person might not have known existed… it's not as easy as simply getting a loan, however, because the credit counselling service is trying to help the individual to eliminate their debt instead of simply shuffling it around.

They can assist the individuals with budgeting their income to help pay off their debts, and also are able to negotiate settlements with some creditors that greatly reduce the amount that the individual owes.

Budgeting

Since credit counselling services are attempting to help people to help themselves, a major part of the services that they provide deals with helping people to use what they have to help them get out of debt. Working with the individual, a credit counsellor can develop a budget plan that the person seeking the assistance might not have been able to come up with on their own.

These budgets are often a bit tighter than some household budgets, since they're designed with a focus towards eliminating the debts that have been hanging around for a while.

Depending upon the severity of the debt, the credit counselling service might also suggest more extreme measures like selling a car in order to purchase a more fuel-efficient model for less money and using the difference to pay off some of the debts. In most cases, however, actions along those lines are unnecessary and a basic budget is all that's needed.

Creditor Negotiations

In addition to assistance in creating a solid budget, credit counselling services also work with an individuals creditors so as to reduce the total debt that the individual owes. Credit counselling agencies are often able to work out a settlement with the creditor so that in exchange for greatly reducing the amount of the debt the individual will work toward paying it off within a specific period of time.

While the amount may be similar to that which would be settled for in a lawsuit, the use of a credit counselling service to make the negotiation saves both time and legal fees and serves to stop the damage to your credit score sooner.

The amount of the reduction can vary depending upon the amount owed and the creditor that it is owed to, but at times these negotiations can reduce the debt by 50%, 75%, or more.