Credit Counseling FAQs
Following are the answers to some of the frequently asked questions about credit counseling and money management.What would be some basic tips related to better credit and debt management?
A credit and debt management advice from a credit counselor is likely to include these tips:
Another term for credit counseling is debt management. What is a debt management plan?
- Use your credit card intelligently to develop a good credit history.
- Review each credit card bill carefully, and pay them at the same time to identify any problems in the bill.
- Obtain your credit report and review it. If there are any mistakes with your credit card or other debts, be sure to contact the credit rating agency immediately.
- If you already have debt on multiple credit cards, stop applying for new ones.
- If you use more than one credit card, transfer your balance to the card with the lowest interest rate.
- Consistently pay your bills on time, as credit card companies can raise your interest rate if you don’t.
- Special cards like those from department stores and gas stations should be avoided as they carry higher interest rates than normal cards.
- If you begin to lose control of your debts, contact a credit counseling agency for assistance.
A debt management plan is a voluntary plan wherein you hire an agency to reach out to each your creditors in an attempt to reduce your interest rates in order to reduce your monthly payments and/or term of payments. Note that the creditors may or may not agree to reduce as this is voluntary.
How does credit counseling work in general?
You would start out by meeting with a counselor. At that meeting, it is determined what your total debt is and what type of debts there. For example, credit counseling is essentially designed for negotiating with the banks (credit cards, personal loans, etc…).
A counselor will typically review your budget and your debt. Next, the counselor will determine if she believes a debt management plan is a viable option. If it is, the counselor would then attempt to put you on a monthly payment plan to pay your creditors for a fee. Once enrolled, you would payments to the credit counseling company who would then pay money to your creditors.
What is a charge off?
A charge off occurs when a creditor believes the debt has become a bad debt. In other words, when an individual falls significantly behind in payments, typically 3-6 months, the creditor will charge off the debt. Note, this does not mean the creditor cannot seek collection of the debt.
Will being enrolled in a Debt Managemet Plan, aka DMP, stop interest from being charged on all accounts?
It is not typical for your creditors to stop charging interest when enrolling in a DMP. However, many times the creditors may be willing to reduce the interest rate.
What if the amount of DMP is more than I can afford?
You should not sign onto a plan that will put you further into debt. If you have created a reasonable budget that you are comfortable with and the DMP payment is higher than your disposable income, then consider other options. Credit Counseling is not for everyone.
What debts are not included in my DMP?
One should be well aware of which debts are part of their DMP. For example, utility bills and other house bills are not included. You should be well aware of what is and isn’t being paid the the DMP account.
Do I have to make payments to my creditors before acceptance into the DMP?
Maybe. Some creditors will want to see that you have enrolled in a DMP and that you have initiated making payments. Other creditors may not have the same requirements but it is important or you to make this determination before enrolling.
Can I reach out to my creditors without hiring a credit counseling agency?
Of course. You can speak to each one of your creditors and try and reach an agreement to forgive or reduce interest. You will have to continue to deal directly with each individual creditor but you will need to create a plan for yourself.
What do I do if cannot afford the DMP?
The most likely option for someone who cannot afford the DMP would be to file for bankruptcy. Note, bankruptcy no longer carries the same stigma as it did in the past. Further, in many situations, bankruptcy is the best option but many people choose to pursue all alternatives before considering bankruptcy. If you are considering credit counseling, it would not be a bad idea to also speak to a bankruptcy attorney to understand your rights.
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