You probably hear about credit counseling all the time. It seems this is the only method even mentioned by the mainstream media. Most of the reason for this is because credit counseling was created by the same banks that issue credit cards and they have the money to market the service heavily. Consumers are often also tricked by the non-profit status that many credit counseling agencies use. This does NOT mean there are no fees.
Credit counseling works as follows. You visit an agency and come up with a budget. You begin writing a check to the agency each month and they divide up the payment between your creditors. They often have arrangement with the creditors which can reduce your interest rates. For this service, the banks pay a “fair share” fee to the credit counseling agency. Some banks refuse to pay a “fair share” fee and their accounts will not be taken on by a credit counselor.
The biggest problem with credit counseling is the lack of flexibility. You are locked into a high monthly payment (usually 80-90% of your current minimum monthly payments). This does not provide the relief that most people need. Often times, program are quoted at 3-5 years and often drag out to 7-9 years. Credit counseling also has a negative effect on your credit since your credit report will reflect that you have used the assistance of a credit counseling agency.
Who should consider credit counseling? People with a short term (6-12 month) income problem such as lost overtime, hospital stay, etc.
