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Credit Counseling - The Basics

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Credit Counseling or debt counseling is sought by consumers who have gotten themselves into trouble with too much debt. Like any other type of counseling a professional will help the consumer develop a plan to payoff the debt. A professional credit counselor can negotiate with your creditors for more lenient repayment terms, interest rates, etc. They will help develop a debt management plan that's realistic for the consumer and the creditors.

Debt Management Tactic - Debt Snowball Method

Reputable credit counselors will often recommend Debt Snowballing to reduce debt balances. The Debt Snowball Method works as follows.

Create a list of all debt accounts smallest to largest
Pay the minimum payment on all accounts
On the smallest account pay as much over the minimum as you can afford (extra amount).
Do the above until the smallest debt is paid off
Then add the old minimum payment from the first account to the extra amount, and use it to pay down the second debt in the list
Rinse and Repeat until your debts are washed away

If done carefully the speed at which the debts are paid down will accelerate or "snowball".

Controversy & Criticism

The credit counseling industry has come under fire for the ways in which it is compensated. Most of their compensation comes from credit card companies who provide 5%-15% kickbacks to the credit counseling agency on all monies collected. The credit counselors create a debt management plan that induces the customer to pay back previously uncollectible debts. This makes the credit card companies very happy. In other words they become a collection arm for the lenders.

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User Comments

last few days our group held a similar talk on this subject and you illustrate something we haven't covered yet, thanks. - Kris

Posted by autoversicherung on 10/28/10, 11:15 PM

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