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Credit counseling is a means of providing education to the consumers about how to avoid incurring debts that can not be repaid. It is more a debt counseling than a function of credit education.

A credit counselor will help someone in debt by working with creditors and building a debt management plan, also known as a DMP. The DMP will list new terms for repayment to the creditors. When you agree to the DMP, there will be an additional service charge along with your new monthly payments. This can be charged as one payment or it can be a part of your monthly payments. Depending on the terms of your DMP, you will also have new interest rates on your lowered monthly payments. When you start your DMP, the credit accounts that are a part of your DMP will be closed and no changes will be allowed in the future.

When a credit counselor negotiates with your creditors, your monthly payments are consolidated into one payment. This payment will be lower than what you were paying to each creditor separately in the past. Banks and credit card companies work with debt consolidators to give you large reductions in monthly payments, usually around 10% to 20%, and sometimes up to 50%.

Almost all the credit card companies allow substantial reduction in the interest rates. Usually, default credit cards have interest rates of about 30% .But once you agree on credit counseling they lower the interest rates to 5-10%.This reduction in turn allows you to pay your debt in a period of 3-6 years which would have taken around 20 years considering the high interest rates. Credit card companies also help you maintain a current status on an otherwise delinquent account. If a consumer makes regular monthly payments then as a show of trust the credit card companies sometimes change the delinquent status of the debtor’s account to current status .Although it does not remove the prior delinquencies, it does give an opportunity to make a fresh start and build a positive credit history.

Debt consolidation began in 1951. The National Foundation for Credit Counseling was the first company to offer credit counseling, and other companies have followed suit since then. Some debt consolidation companies are for profit, while others are charitable foundations, such as the Consumer Credit Counseling Service. Credit counseling companies can be found worldwide. Even with this popularity, debt consolidation does have some drawbacks. It can hurt your credit score, even though some companies state that it will not. These companies say that they will note that you are participating in credit counseling on your credit report. Keep in mind, however, that creditors look at your debt to income ratio, which means that it can still be difficult to open more credit accounts.

All in all, consolidating your debt can help you if you are already in a lot of financial trouble. Just make sure that you know exactly what you are getting into if you are thinking about credit counseling. Do your research before agreeing to anything.

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