When Non Profit Credit Counseling is the Right Choice

The following page answers the question: when is non-profit credit counseling the right choice? To delve in this topic, one must first learn what credit counseling is, its advantages and disadvantages, its effect on your credit score, and all the alternatives you have to it.

What is Credit Counseling?

Credit counseling is a method of helping people get themselves out of debt and is an alternative to filing for bankruptcy. The United States Department of Justice keeps a listing of approved credit counseling agencies by state and judicial districts for those who are not sure where to begin. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires those who for bankruptcy in the U.S. to undergo credit counseling, so there has been significant growth in the number of providers of consumer credit counseling since then. Not all credit counseling services are legitimate, however. Some are scam operations that exploit people who are desperate, so it is critical for consumers to thoroughly research any credit counseling agencies they consider working with.

Advantages of Credit Counseling

Like any approach to conquering debt, credit counseling has its good points and bad points. Some of the advantages to consumers include:

• Avoiding filing for bankruptcy
• Learning to follow a budget
• Consolidated bill payments for simplicity
• Less of an effect on credit scores than bankruptcy

Disadvantages of Credit Counseling

Credit counseling has its disadvantages as well, including:

• A high percentage (45%) of those receiving credit counseling drop out before paying off their debts
• Most lenders won't lend to those in credit counseling until the counseling period ends (typically three to six years)
• Like bankruptcy, a credit counseling notation on credit reports can adversely affect a person's chances with potential employers
• Some debts cannot be consolidated into a consolidated bill payment program

Effects of Credit Counseling on Credit Scores

Even if a person receiving credit counseling avoids filing for bankruptcy, it can take years for credit scores to improve. The leading credit scoring entity, Fair, Isaac & Co. (FICO), does not include the fact that a person is in credit counseling when computing credit scores. But the fact is listed on credit reports, and it is up to lenders' discretion whether they view that information as positive or negative. People in credit counseling who enter a debt management program will take a smaller hit to their credit score than those who declare bankruptcy. Unfortunately, if debt payments take up too big a chunk of income, bankruptcy may still be unavoidable.

Alternatives to Credit Counseling:

Some alternatives to credit counseling include:

• A do-it-yourself approach to cutting expenses and devoting more income to paying off debt. When successful, this method is least damaging to future credit prospects
• Negotiating directly with creditors for lower interest rates or lower payments in exchange for extending the term of the credit
• Debt consolidation loans, which are best for those whose situations have not yet become desperate
• Chapter 7 bankruptcy, which wipes out unsecured debts and allows consumers to rebuild credit starting six to eight months after filing
• Chapter 13 bankruptcy, which creates a three- to five-year repayment plans, after which any remaining debts are discharged

People considering credit counseling should choose their credit counseling service carefully and should weigh the costs and benefits of credit counseling against other methods of dealing with debt before proceeding.

Sources:

http://www.bankrate.com/finance/debt/credit-counseling-damaging-as-bankruptcy.aspx
http://www.justice.gov/ust/eo/bapcpa/ccde/cc_approved.htm
http://articles.moneycentral.msn.com/Banking/YourCreditRating/why-credit-counseling-often-fails.aspx