|
Credit Counseling FAQ
Q: With so many credit counseling services promising to help with my debt, how can I know which one is best?
A: The only way to know which credit counseling services are legitimate is to check out their status as a non-profit organization, review their file with the Better Business Bureau and ask for recommendations from friends or family members who have already undergone credit counseling.
Q: How exactly does credit counseling work?
A: During credit counseling, a debtor’s financial situation is analyzed by a counselor who will then help to determine whether or not the service will be effective. A credit counselor will first write down each debt, the balance, current interest rate and minimum payment. Following that, a credit report is often pulled to make sure that every debt has been disclosed. At that time, the credit counseling agent will attempt to work out a realistic budget, which will include necessary monthly expenses, insurance payments, entertainment costs and debts. Because these counselors regularly work with creditors, they know how low of an interest rate and minimum payment they may be willing to accept. Once a budget is created, a contract will be signed and you will make the first payment directly to the credit counseling agency.
Q: What happens if my credit counselor cannot come up with a budget that I can afford?
A: When credit counseling is not an option, the counselor will usually recommend the filing of bankruptcy. In fact, the new bankruptcy laws that took effect in late 2005 made it necessary that all filers first undergo credit counseling before filing a bankruptcy petition.
Q: How much does a credit counseling service cost?
A: It depends. Those that are not credible will charge very high fees just to get you started with the program, which is a very bad sign. A legitimate credit counseling service will not charge outrageous fees because, if you had the extra money to throw around, you wouldn’t be having financial difficulty.
Q: Can creditors still sue me while I am involved in credit counseling?
A: Yes. The only time that a creditor is prohibited from attempting to collect a debt is during or after a bankruptcy case in which their debt is being discharged.
Q: Can a credit counseling service really do anything for me that I cannot do myself?
A: If you know how to negotiate, then you can often get the same kind of deals that any credit counseling service can get for you. You can get your payments and interest rates lowered, but you have to be able to show a genuine need and ask for a hardship program.
Q: Is credit counseling a type of debt consolidation loan?
A: This is one of the most common misconceptions, but no. Credit counseling is in no way, shape or form a consolidation loan. There are no loans made with credit counseling, but rather a budget is set and you make payments to the counseling agent, who then disburses your payments to creditors according to that budget.
Q: Will credit counseling hurt my credit score?
A: Yes, enrolling in credit counseling will hurt your credit score for several reasons. First and foremost, you will have to be behind with payments before you can enroll in a credit counseling program and the creditors will accept smaller payments from you. Secondly, if you enroll in a credit counseling program, you are handing over your finances for someone else and that often hurts your credit score more than if you would try to resolve your own financial hardships without entrusting them to a third party.
|