How To Effectively Use Credit Counselling
Credit counselling varies from counselor to counselor. It is supposed to be an education program to help consumers learn how to avoid incurring debts that they find difficult or even impossible to repay. However, it is sometimes not so much education as a relief program after the excess obligations have been incurred.
Some functions of this type service, in addition to what education is provided, is to help negotiate better repayment terms, and sometimes even in lessening the amount of debt that has to be repaid. When the counselling service negotiates with creditors, they can sometimes get an agreement to consider the debt paid in full with only a portion of it being paid.
It may seem strange that a creditor is willing to accept only a portion of the debt as full payment. This is because they figure it is better to get paid a part of the total than to not get anything. Negotiating with an intermediary means they will at least be assured of the revised plan being followed. They are willing to negotiate better terms to be assured of getting regular payments as agreed upon. Often, when over-extended, consumers get discouraged and give up on trying to pay.
There are different ways that these negotiators can function. They may demand that the whole paycheck be given to them to distribute as previously planned between them and you. You will receive the agreed upon amount for personal expenses, and the rest will be given to your creditors. The different creditors will be paid a percentage of the total available funds, based on the amount they have invested.
If you get a regular paycheck of the exact same amount each time, this works well. However, if you are one of those who gets a varying paycheck each pay period, based on commission or hours worked, it is a bit harder. In this case, the agent will take your paycheck, give you the budgeted personal amount, then use the rest to pay each creditor a percentage. This percentage is based on the amount of their obligation based on your total debt.
Counselling and debt management plans are not the same, though the latter is often part of the former. A debt management plan helps you because you are often able to pay less per month. If your payments exceed what you have available for payment, this is good for you. In addition, charging is frozen until all obligations are paid, so there is not the temptation to add additional debt as you go along.
Not all arrangements are the same. Some will charge the client a portion of their money each pay period, and others only earn a percentage of what they collect for creditors, paid by the creditor. It is good to listen to criticisms of the industry and make sure not to get caught up in an unscrupulous practice.
Though credit counselling that involves education has a greater long-term effect, and is preferable to a simple debt management plan, both methods are helpful. The latter may be necessary at first, with education coming later after some relief has been seen. The education of consumers about debt and budgeting can help them prevent repeating their initial mistakes.
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