By Joseph Nykoluk:

Assuming you have already found a good credit counselor to help you pay off your debts, you will want to know the process they will go through so that they act in your best interests.

Process #1

First off the credit counseling service will contact your creditors and start negotiating with them to create a debt management plan specific for your needs. The goal of a successful plan set up by your counselor is to help you to repay your debts with the aid of a repayment plan with your creditors.

If successful, the debt management plan would consist of:

  • - lower monthly payments
  • - lower fees
  • - and, of course, lower interest rates for you

Your credit counselor will refer to the terms dictated by your creditors in order to determine the payments or interest reductions offered within the debt management plan.

Once you agree to the repayment plan, your creditors will close your accounts and restrict them to future charges. Your main benefit of seeing a credit counselor in the first place is for them to consolidate all your monthly payments into one single monthly payment. As they say - “the whole is better than the sum of its parts”.

This one single payment may seem quite large, but if you add up each of your regular payments to each creditor separately, you will find that they add up to more than if you just had to make a single payment.

Banks that offer credit cards will usually accept lower monthly payments from their customers through a debt management plan as they know it would be tougher for them if they were to make payments on their own without any counselor’s assistance.

Although some debt management plans advertise that their clients can save as much as 50% in monthly payments, the average reduction is usually between 10% and 20%

Process  #2

Another major benefit to having a debt management plan in place for you is the reduction in interest rates that you would have to pay to your creditors. If your credit card happens to be in default, the interest rates that you could be paying may approach upwards of 30%.

However, by seeing a credit counselor that can negotiate a good debt management plan for you, it is possible to secure interest rates in the 5% to 10% range, especially for bank credit cards. Heck, you may even be able to get the interest charges eliminated completely.

Negotiating a reduction in interest rates also benefits the counseling agency because they are able to advertise that their customers can be debt free in much shorter time periods. So, if it would normally take 20 years to pay off your debts, the credit counselor should be able knock about 15 years off of that payment schedule. This is very significant and an attractive advantage if your debts are quite high.

Process  #3

If your debts happen to consist of delinquent accounts, your credit counseling agency will proceed to make those accounts “current”. This is often called “re-aging” or “curing” an account. This usually occurs after making a series of on-time payments through the debt management plan as a show of good faith and commitment to completion of the program.

For example: – a client with an account that has a monthly payment of $50 but that monthly payment has not been paid in two months, might be considered by the creditor to be 60 days past due. After agreeing to the debt management plan and you make three consecutive on-time monthly payments, your creditor could “re-age” the account to reflect a current status.

This is good news because the credit bureaus would be notified that your account is now current. With this in place, your credit rating has now just been improved. However, you should also know that this process does not eliminate prior delinquencies from the credit reports.

At least this will give you some breathing room as it gives you the chance for a fresh start and for the opportunity to start building a positive credit history. Like all negative credit information, only the passage of time will lessen the impact of negative marks when credit scores are calculated.

Another thing to remember is that you still need to pay the credit counseling company for services rendered. After all, they are a company and they need to make some sort of income. You need to be aware of the amount of fee and agree to it before you sign on the dotted line.

Because the credit counseling company knows that you are in a financial bind, the fees they charge are usually not that high. This is where you need to do your homework and find a counseling service that’s right for you. Where the credit counselors are compensated the most is from the creditors themselves. This has led to speculation that credit counselors are actually just sub-department of the creditors themselves.

See Part 2 – What Can Good Credit Counselors or Debt Consolidator Do For You

Resources:

- Credit Counseling Canada

- Credit Counseling Resources

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Filed under: Debt-Credit-Counseling

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