Understanding Credit Counselling

If you have a poor credit history but you want to do something about it then credit counselling may help. But what exactly is credit counselling, and more importantly, is it the right approach for you?

Credit counselling, also known as debt counselling was originally created as a way to educate people about how to avoid the simple mistakes that can add up to credit problems. The aim is twofold, firstly to teach people about how to use credit responsibly and also how to get yourself out of trouble if you have used, and abused, too much credit in the past.

There are several specialist credit counselling agencies in the UK that all provide a similar service. They work with you to get you back on the road towards financial stability and they can help you to repair your credit score.

How Can Credit Counselling Help?

Credit counselling agencies are able to provide their clients with advice on better ways to use credit, how to create a budget, pay bills on time and to generally manage money more wisely.

Once you have selected a credit counselling agency, they will ask you for personal details about yourself and your finances. They will then talk to you about your situation and draw up a personal plan designed to give you the help that you need.

Debt Management Plans

Credit counselling can also involve taking over the dealings of the client and the people or companies they owe money to. This type of approach usually comes with a specially prepared Debt Management Plan (DMP). A DMP is drawn up by the credit counselling agency and their client and sets out a plan to repay all creditors, for example mortgage lenders and credit card and loan issuers.

The credit counselling agency then acts as the ‘go between’, negotiating on the client’s behalf with the lenders in a bid to reduce monthly repayments and lower interest rates paid by the client. The agency can also recommend that the lender suspends any additional charges for late payment to avoid the client going further into debt.

In the most severe cases a credit counselling agency may recommend that the client files for bankruptcy or an individual voluntary arrangement that could write off a large portion of your debt. Bear in mind, however, that these agreements should really only be considered as a last resort when all negotiations to repay outstanding debts have been unsuccessful.

The Hidden Costs of Credit Counselling

DMPs can be a big help to many people in serious financial trouble. Of course, if the credit counselling agency takes on such a role, they will usually charge a fee for doing so. You also have to relinquish control of your finances, which may not be the best approach for you.

This is where you have to question whether the services that the credit counselling agency provides are actually worth paying for. You may, for example, be able to obtain similar but free advice from your local citizens advice bureau, or from other charitable organisations.

Unfortunately, higher rates of unemployment and the aftermath of the global recession mean that increasing numbers of people are looking for help and advice on how to deal with their debts. Many credit counselling agencies provide a genuine and useful service to consumers.

You should bear in mind though that some charge excessive fees that offer little value for money. Before you consider using a credit counselling service, think about whether you have exhausted all the other options available to you first.