Credit Counseling: ‘Drowning in debt’ is by far one of the most traumatic experiences there is, though completely preventable. This is why credit counseling is important to those intending to involve themselves in such matters. Investopedia defines ‘credit counseling’ as a means of providing consumers with guidance on credit, money management, debt management, and budgeting.
The goal is to help a debtor avoid bankruptcy.
Background on debt in America: In an article published on Debt.Org, the average American has USD 90,460 in debt, according to a 2021 CNBC report. It includes all forms of consumer debt products – credit cards, personal loans, mortgages, and student debt.
The average amount of debt by generation (in 2020) is highest among the Gen X (ages 40 to 55) at USD 140,643 followed by Baby Boomers (ages 56 to 74) at USD 97,290, and millennials (ages 24 to 39) at USD 87,448. Moreover, the typical American household has an average debt of USD 145,000 whereas the median debt in 2000 was only USD 50,971.
How to get out of debt?
Is credit counseling reliable? Reputable credit counseling institutions employ certified and trained counselors. They help clients develop a plan to manage their credit issues. Most companies lead clients into creating a ‘debt management plan’, a way for clients to make one monthly payment to the credit counseling company and the latter will disburse the money to creditors on the client’s behalf, based on a payment schedule all involved parties agree on. This may include credit card bills, student loans, and medical bills to mention a few.
Who is the right candidate for credit counseling? According to The Dollar Stretch, you are a good candidate for credit counseling if you possess the following attributes.
- The combined balance on your credit cards is over USD 10,000
- You have not fallen behind on your payment
- You owe money on your cards more than you did six months ago
- You are not able to pay more than the minimum each month
- You are not able to reduce the amount you owe
Moreover, the finance website added that you have to talk to a credit counselor about debt settlement and bankruptcy if you are experiencing issues mentioned below:
- You haven’t paid anything on your credit card for months
- You are getting phone calls from debt collectors
- It would take you five years to pay off debts
- Your income is not enough to cover your expenses
Can credit counseling get you out of debt? Yes, they can. However, it still depends on your situation and needs. Counselors can review your income versus spending and come up with realistic budgeting. They can also suggest different debt management methods such as debt snowball and debt avalanche. Most of all, they will help you get your way out of debt and avoid bankruptcy.
Bankruptcy is considered a negative on your credit report and would highly affect how future lenders view you. It may prompt creditors to decline extending credit or might even give you higher interest rates and less favorable terms.
The gist of credit counseling is to help you manage your debt once you are unable to yourself. It is also useful for the debtor to explore methods and ways to eventually get out of debt. Click here to learn more about debt reduction strategies and credit counseling.