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How Does Credit Counseling Work?

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$972 billion...a staggering amount of money that's difficult for most of us to even conceive. According to Federal Reserve statistics, that was the approximate amount of revolving credit card debt owed by United States consumers in 2007.

With more than 40% of American families spending more than they earn, and the average household paying $950 each year in interest fees alone, we're definitely living in a time of harsh financial realities. For those who are facing a credit crisis, the expert guidance offered by a legitimate credit counseling service can be the difference between a bleak future and a new beginning.

What is Credit Counseling?

Credit counseling is a service provided by specialized agencies to help consumers who do not have the means to repay their debts, as well as businesses facing financial struggles. With the help of a credit counselor, a consumer or business can often work out an arrangement to resolve their debt without facing angry creditors or going through the long, complicated and damaging process of declaring bankruptcy.

A credit counselor will contact credit card companies and other lenders and negotiate lower payments or interest rates to make debt repayment easier. Some also offer debt management consulting to help clients create a new business plan or family financial plan to reduce risky behaviors and become more fiscally responsible.

Most reputable credit counseling services are offered by non-profit organizations with the goal of helping struggling consumers reduce their debt-not making money from others' problems. Your agent should add up your monthly credit payments and add a minimal processing fee to cover administrative expenses. In some cases, credit counselors negotiate to collect a fee from creditors in exchange for collecting the funds owed to them. Credit counselors that charge a large fee up front or that offer to make your debt problems disappear almost magically are probably not legitimate.

Who Needs a Credit Counselor?

If you feel overwhelmed by debt or have trouble making your monthly payments on credit cards, store accounts, mortgages, or other forms of debt, you could probably benefit from the services of a credit counselor. It is possible to get out of debt on your own, but some expert guidance from a concerned, accredited organization can make the process quicker, easier, and far less painful.

Crediting counseling is a good way to demonstrate to your creditors or to a collections agency that you are actively working on repaying what you owe. A credit counselor will also provide guidance on the most effective ways to get rid of debt, minimize interest payments, and develop smarter spending and saving habits.

What do I stand to Gain or Lose?

Credit counseling can help businesses, families, and individuals to consolidate debt, reduce interest rates, and pay off what they owe as quickly and easily as possible. A counselor can also help you create a budget, save money, and learn to spend responsibly.

Although using a credit counseling service can temporarily lower (or hurt) your credit score, in the long term this lowering won't have nearly as much of a negative impact as unpaid debts or bankruptcy. A declaration of bankruptcy remains on your credit record for 7 to 10 years, but debt repayment with a qualified credit counselor can erase negative marks and begin to repair your credit score within months.

Achieving success with credit counseling hinges on hiring a legitimate, reputable service. Like any industry, there are scams out there that prey on the anxiety of struggling consumers, as well as some credit counselors who are just not as good at their job as others. A good place to start is the Consumer Credit Counseling Service (CCCS), an agency that accredits legitimate firms. You can also seek referrals or ask a prospective credit counseling service for client recommendations.

Another harsh reality: Federal Reserve statistics show that 92% of Americans' disposable income is spent on repaying debts. Credit counseling makes it possible to eliminate those debts faster and more efficiently. Debt repayment will still require time and effort, but the guidance of a good credit counselor can remove some of the "trial and error" element and give you the encouragement and guidance you need to finally live debt-free.

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