The Basics of Credit Counseling

The following is a guest post.

The process in which consumers are enlightened on the steps necessary in order to steer clear of incurred/ incurring debts is termed as Credit Counseling. Credit counseling is also the first procedure that the consumer must complete before his application for bankruptcy has to be approved. Human psychology plays a major part in the process of counseling. The consumers are subject to a series of enquiries about their lifestyles, saving habits, spending behavior, investments, finance- planning and other related information, into which the counselors get an insight; so that they may decide the order of debt- relief planning. Hence credit counseling is also called as a ‘Debt Management Plan’ or the DMP.

Through the process of credit counseling, the consumers are advised on the ways and means to avoid bankruptcy and also how to manage their finances so that the road ahead will not prove to be difficult as regards repaying of debts.

Many a time, coming to a settlement with creditors forms a part of the credit counseling process and a plan on how to manage repayment of the monetary outstanding obligations is mapped. This is done in a number of ways like reduction in the payments that are due, reduced rates of interest and also fee-reduction in some cases.

First, once the DMP (Debt Management Plan) is decided upon, the customer’s account is closed and is rescheduled for further changes. Usually, several monthly payments are merged into one single monthly payment; the value of which is generally lower (approximately by an amount of 10-20%) than that of the total of previously paid monthly installments of the customer, as per the requisition of the credit cards banks, which involves acceptance of lower monthly payment from customers in a DMP as compared to the situation had the customer been paying the account out of his own pocket.

For a customer who has a defaulted credit card account, normally, the applicable interest rate for payment is near about 30%. But when the DMP is involved, there occurs at least lowering of the yearly rates to 5-10%; if not zero percent, which is also done by certain credit banks when the situation is beyond the customer’s control. Due to this breathing space provided to their customers, the counseling agencies publicize the fact that the twenty odd years that would have normally been taken by the customers to repay the debt would now be changed to only about three to six years as the rates of interest as well as the debt amounts have been sufficiently reduced due to the DMP.

Regularization of accounts that were termed as ‘failing’ accounts before the DMP now can be made ‘current’ as a result of the credit counseling processes. For this, a number of regular and timely payments are made through the debt management plan in order to demonstrate dedication to the plan and give assurance that payments as prescribed would be made without defaults. This is called as ‘Re-aging’ or ‘Curing’ the account. While the previous defaults will not be deleted from the credit bureau’s statements, it certainly helps the customer to get another chance at creating an affirmative credit history. After a few years, the credit scores may look good, but there is always a possibility of the debt collectors taking legal action against the defaulters, as six years is the limit for the worth of a credit card debt.

Thus, in many cases, credit counseling goes a long way in reducing consumer debts and has benefited millions of people in the world that have been assailed by credit problems.

Smith Paul likes to write articles on personal finance related to the Stock Market, Credit Counseling, Debt Consolidation, Government Debt, Housing Market and U.S. Real Estate Market.  For the latest updates, visit