Consumer credit counseling is an alternative to filing bankruptcy. It is professional counseling that provides you with financial education and debt counseling according to your situation.

Once you consult with a credit counselor, the counselor will assess your debt level and work out a payment plan based on your income. Some credit counselors can negotiate lower interest rates and set up a debt management plan with your creditors.

How Credit Counseling Works

The credit counselor analyzes your credit situation including number of accounts, balance, minimum payment, balance due, and any past due account. The counselor then considers your monthly income and bills. Using this information, the counselor puts together a debt management plan (DMP) for paying off your debts. The proposed plan is sent to each of your creditors for approval. Once your creditors agree to the DMP proposed by your counselor, you begin making payments to the credit counseling agency. The credit counselor disburses payment to each of your creditors in accordance with the DMP. In most cases, your credit accounts are closed to future charges as long as you are on the DMP.

Costs

A lot of credit counseling agencies claim to be non-profit. Even if the credit counseling agency says it’s non-profit, that doesn’t mean the services provided to you are free. In many cases there’s some kind of fee involved. Some agencies use your first payment to cover their fees, while others deduct a flat amount from your monthly payment.

You should never pay a fee just to obtain information about the company and services offered.

Do You Need It?

A consumer credit counseling agency doesn’t have any rights or privileges that you don’t also have. Anything a credit counselor can do for you, you can do for yourself. Even so, there are many people who enjoy the convenience of the services provided by credit counselors.

Consumer credit counseling can help if you aren’t sure how to negotiate a payment plan with your creditors. Some credit counselors have experience in working with creditors, they are sometimes able to negotiate better payment terms than you could on your own.

If you don’t think you will be disciplined enough to distribute payment to your creditors each month, it’s usually better to work with a credit counselor. That way, you are responsible for making one monthly payment to cover your credit card bills. The credit counselor does the rest

Many consumers find they have too many credit cards to easily manage themselves, and are in need of some form of credit card consolidation. Credit counseling is one of the most common debt relief options for people in need.

Credit counseling programs typically have their clients close all of their credit card accounts, and instead of paying each of their creditors each month, are expected to make a single payment directly to the credit counseling organization, which in return, disperses the payment to each of the creditors. Aside from the credit card consolidation payments, the primary benefit of credit counseling is the fact they usually are also able to negotiate lower interest rates for their clients, which reduces the amount of time it takes to get out of debt. Before choosing credit counseling, or any other debt relief option, it is always advisable to explore your options.

Many universities, military bases, credit unions and housing authorities operate nonprofit financial counseling programs. Some charge a fee for their services. Creditors may be willing to accept reduced payments if you are working with a reputable program to create a debt repayment plan.

However, credit counseling organizations have faced scrutiny because of their misuse as a "nonprofit" organization. Because an organization says it is a "non profit," there is no guarantee that the services provided are free, affordable, or even legitimate. In fact, some credit counseling organizations charge high hidden fees, or even urge consumers to make voluntary contributions that can cause more debt.

Most credit counselors offer services through local offices, the Internet, or on the telephone. If possible, find an organization that offers in-person counseling. Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals.

Be wary of credit counseling organizations that:

• Charge high up-front or monthly fees for enrolling in their program.
• Pressure you to make "volentary contributions," which is another name for fees.
• Refuse to send you free information about the services they provide without requiring you to provide personal
  financial information, such as credit card account numbers, and balances.
• Try to enroll you in a debt management plan (DMP) without spending time reviewing your financial situation.
• Offer to enroll you in a DMP without teaching you budgeting and money management skills.
• Demand that you make payments into a DMP before your creditors have accepted you into the program

What to watch out for

Once you've decided you want credit counseling, you should investigate the company or service carefully before signing up. Red flags to avoid include:

• Big upfront fees. Consumer Credit Counseling Services typically charge a $10 set-up fee. If you're paying a lot more, you may be the one who's getting set up, unless you're getting extensive and personal money coaching that could justify the fee.
• No accreditation. Legitimate credit counseling firms are affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.
• Delayed or missing payments. Some companies pocket your first months' payments as a fee, rather than passing the money on to your creditors. Missing payments can hurt your credit rating. Find out how much of each monthly payment is going to your creditors, and when it will be sent to them.

What counseling can do to your credit?

Here's another controversial topic. You may have heard that credit counseling will trash your credit report or even that it's "worse than bankruptcy." Neither is really true. Credit counseling may have some effect on your credit, or it may have none at all. Some lenders may not want to do business with you after you've completed your plan, but others will.

Contrast that with a bankruptcy, which is viewed by almost all mainstream lenders as a huge negative on your credit report. These lenders, who prefer to deal with consumers with good credit, typically won't do business with you for the 10 years the bankruptcy remains on your file.

What happens to your credit during counseling largely depends on how your lenders report your account to the credit bureaus.