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Credit Counseling
Credit counseling (known in the
United Kingdom as debt counselling) is a process offering education to
consumers about how to avoid incurring debts that cannot be repaid. This
process is actually more debt counseling than a function of credit
education.
Credit counseling often involves negotiating with creditors to establish
a debt management plan (DMP) for a consumer. A DMP may help the debtor
repay his or her debt by working out a repayment plan with the creditor.
DMPs, set up by credit counselors, usually offer reduced payments, fees
and interest rates to the client. Credit counselors refer to the terms
dictated by the creditors to determine payments or interest reductions
offered to consumers in a debt management plan.
Common features of Debt Management Programs
After joining a DMP, the creditors will close the customer's accounts
and restrict the accounts to future charges. The most common benefit of
a DMP as advertised by most agencies is the consolidation of multiple
monthly payments into one monthly payment, which is usually less than
the sum of the individual payments previously paid by the customer. This
is because credit cards banks will usually accept a lower monthly
payment from a customer in a DMP than if the customer were paying the
account on their own. Some DMPs advertise that payments can be cut by
50%, although a reduction of 10-20% is more common.
The second feature of a DMP is a reduction in interest rates charged by
creditors. A customer with a defaulted credit card account will often be
paying an interest rate approaching 30%. Upon joining a DMP, credit card
banks sometimes lower the annual percentage rates charged to 5-10%, and
a few eliminate interest altogether. This reduction in interest allows
the counseling agencies to advertise that their customers will be debt
free in periods of 3-6 years, rather than the 20+ years that it would
take to pay off a large amount of debt at high interest rates.
A third benefit offered by credit counseling agencies is the process of
bringing delinquent accounts current. This is often called "reaging" or
"curing" an account. This usually occurs after making a series of
on-time payments through the debt management program as a show of good
faith and commitment to completion of the program. For example, a client
with an account with a monthly payment of $50 which has not been paid in
two months might be considered by the creditor to be 60 days past due.
After joining the DMP and making three consecutive monthly payments, the
creditor could reage the account to reflect a current status. Thereafter
the monthly payment due on the statements would be the monthly payment
negotiated by the DMP, and the account report as current to the credit
bureaus. It should be noted that this process does not eliminate the
prior delinquencies from the credit bureau reports. It merely gives a
fresh start and an opportunity for the client to begin building a
positive credit history. Like all derogatory credit information, the
passage of time will lessen the impact of the negative marks when credit
scores are calculated.
Many educational facilities have begun to incorporate credit practice
into the curriculum. Schools have been incorporating the Charge Large
Board Game. Players or students now learn and practice using credit
paying-off in cash. The different level credit cards and upgrading
system (in the Charge Large game) makes for an incentive for players to
use their credit card and paying them off in full. It is said by 2011,
the Charge Large Board Game will be in 70% of colleges practiced during
orientation and in the classroom setting. In addition, by 2011, the
Charge Large Board Game will be in 65% of high schools throughout the
United States. Therefore, students receive credit counseling prior to
receiving any form of credit.
History of credit counseling
The first credit counseling agencies were created in 1951 in the United
States when credit grantors created The National Foundation for Credit
Counseling, or NFCC. According to W. Patrick Boisclair, Chairman of the
NFCC's Board of Trustees, "the NFCC initially monitored legislative and
regulatory activity for its retail credit members" and "also conducted
public awareness campaigns on credit."(source) Their stated objective
was to promote financial literacy and help consumers avoid bankruptcy,
but they did not serve as collection agencies for the creditors. The
first local credit counseling franchises emerged in the 1960s, offering
education and counseling directly to consumers.
In 1993, the “Association of Independent Consumer Credit Counseling
Agencies,” or AICCCA, was founded, citing a need for “industry-wide
standards of excellence and ethical conduct.” It's founder and
president, Joel Greenburg, was disbarred for stealing. This formally
organized the NFCC’s competition. The AICCCA was formed from the group
of counselors who favored telephone delivery of debt management
programs. The NFCC was, in the beginning, strongly opposed to this
telephone business model, primarily favoring face-to-face counseling as
a more effective solution. Eventually, all organizations practiced both
phone and face-to-face processes with some agencies using large inbound
call centers driven by mass media advertising.
The credit counseling industry’s third major trade organization is its
largest: the American Association of Debt Management Organizations, or
AADMO.
However, not all credit counseling agencies belong to a trade
organization, nor are they required to do so; there are well over 1,000
active credit counseling organizations in the United States.
In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of
2005 made credit counseling a requirement for consumer debtors filing
for Bankruptcy in the United States. In order to meet this requirement,
during the 180-day period preceding the filing of bankruptcy, the debtor
must complete a program with an approved nonprofit budget and credit
counseling agency. Such a program may include, but is not limited to,
one counseling session conducted by phone or over the internet. In
addition, a post-filing debtor education credit counseling session is
required in order to complete the bankruptcy process and to have your
debts discharged.
Credit Counselling is also a growing industry in Europe, both for
profit-making debt management companies and charities such as Christians
Against Poverty and the Consumer Credit Counselling Service, Britain's
largest debt advice charity. |
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