Before determining if credit counseling is the right solution for your particular needs, it is important to understand the pros and cons as well as alternatives that might work better.
Basics of Credit Counseling:
Before looking into a credit counseling company, it is important to understand the basics of the service. Understanding what credit counseling does will make it easier to determine if it is the service you need.
A credit counseling service is a company that is designed to help you manage your financial situation without taking any extreme measures. The service will require paying a set fee and will not waive the expense even if your financial situation makes it hard to pay. On the other hand, many services will not charge until after providing assistance that will usually clear up some funds.
Credit counseling focuses on paying the full amount of the loan, but works through a combination of setting up new payment plans that are a little easier on the wallet, budgeting and working out a method of ensuring that the payments are made each month.
After looking over your financial information, the counselor might determine that more extreme measures than budgeting and reworking the payment plan are necessary. Such a service will make suggestions that are often useful and that will avoid turning to bankruptcy.
When dealing with the pros and cons of credit counseling, it is important to consider the potential advantages. These might make a difference in the selection of a service that fits your needs.
The key advantages that come with credit counseling services include avoiding bankruptcy, maintaining a decent credit score, working out a budget that is realistic, obtaining education related to improved finances, and helping motivate you so that it is possible to repay the loans.
While the key advantages primarily relate to improvements to finances, budgeting and working out a plan that will help, other advantages might occur in some situations. The individual situation will often dictate appropriate actions that the counselors can take. In some scenarios, the counselor will ask the creditor to drop added fees, lower interest rates and create a payment plan that is easier to manage. Some creditors are willing to drop fees and lower interest, but it depends on the particular situation and creditor.
Along with the positives, it is important to understand the potential negatives associated with the credit counseling program. The cons of the service are important to understand when trying to make an educated decision about the best service to meet your needs.
The major disadvantages of the service include the monthly fees, strict repayment plans, frozen accounts and the potential to work with unethical companies. Not to mention, no principal reduction, only more time to pay what you owe for a longer time. This means you usually end up paying more interest for the life of the program.
Credit counseling is not always the best way to solve the problem because some companies will work with their best interests in mind rather than your particular needs. The key disadvantage of credit counseling is the potential risk of finding a fraudulent or scam company. It is vital to use caution when looking for a company that will deliver what it promises and that is often a disadvantage for consumers who are already struggling with their debts.
The alternatives to credit counseling are often a better solution to the problem. The two main alternatives that might help are consolidation and debt settlement. Consolidation and settlement services focus on negotiating with the creditor to reduce your interest rate or pay a lump sum of cash to settle the account.
On average, consolidation and settlement through negotiation will take around two to four years to completely pay off the debts, depending on the particular service. Settlement typically takes a little less time while consolidation will usually take a little longer before the debts are paid off.
In both situations, you can expect a short-term negative impact on your credit score. This is temporary and since the service pays off the unsecured debts within two years to four years, it is easier to recover quickly and ultimately will help improve your credit over time.
The best debt relief companies understand that you are already struggling with your expenses, and do not charge any up-front fees to help negotiate reduced interest or a settlement on your credit card accounts. They should only charge a fee after you have received credit card relief, making it a more affordable service than credit counseling.
Credit counseling is not always the best solution for every individual. In most situations, consumer credit card counseling does not offer enough to meet the needs of men and women who are struggling with massive debts and barely able to keep up with the minimum payments.