What Is Consumer Credit Counseling And Is It Right For You?

For hundreds of thousands of Americans—close to 800,000 in 2018 alone—filing for bankruptcy can frequently seem like a last resort. While bankruptcy can actually be a beneficial way to start your life over free from debt, using consumer credit counseling services designed to avoid bankruptcy are becoming increasingly popular. Utah, for example has been ranked as the state with the fourth lowest credit card debt  in the country (the average resident carries approximately $7,727 in total credit card debt.)

Consumer credit counseling services are probably one of the most effective visible means of reducing debt. They’re certainly one of the most visible. There’s over four dozen debt management service providers  and credit counseling agencies registered in Utah alone. But what does this mean to you as a homeowner? Does filing with one lower your interest rates—or actually increase them? What if you’re looking to purchase additional property? And how can you make certain they’re not only legitimate, but worth your while?

What Is Consumer Credit Counseling (CCCS)?

Consumer credit counseling agencies essentially act as a liaison between creditors and individuals with the purpose of reducing debt by establishing monthly repayment plans. In many ways, they can be thought of as a go-between acting on your behalf; not only will they evaluate your budget, they’re charged with the task of providing the best course of action which can suit both creditors and borrowers.

One of the chief ways a consumer credit counseling service can help you is by reducing any increased monthly interest fees as a result of your debt—in some cases, eliminating them altogether. While it’s tempting to think of your creditors as being effectively predatory and unsympathetic, the truth is they’re simply looking for a realistic solution which can be mutually beneficial. Many companies are more than willing to negotiate interest rates if they can be reassured that your debt can be paid off timely and effectively. And for homeowners, this can be an excellent precaution against the threat of default—the first step towards establishing foreclosure proceedings.

Another benefit to consumer credit counseling is that they’re not only liaisons. They’re educators, as well. In fact, you’re legally required to seek their services prior to filing for bankruptcy. Managing debt can be tricky for many home owners. Penalties, interest rate fluctuations and life changes can all become hopelessly entangled. Credit counseling services can help you manage the rough spots of your personal finances both immediately and in the future.

What Is Debt Consolidation?

One common alternative to bankruptcy that a consumer credit counseling agency may suggest is a debt consolidation loan—in particular, one that can be secured through the equity currently in your home. Depending on your credit, this could potentially be arranged by refinancing through a second mortgage or a home equity line of credit. While there is a definite upside through applying for either, the greater argument against it is the fact you’re going to be using your home as collateral. And unless you can keep up with the additional payments as a result, you may find yourself facing eventual foreclosure—particularly if you find your debt is actually greater than the amount of your home equity.

Can Consumer Credit Counseling Hurt My Credit?

It might seem like a bit of a paradox to sign up for a credit counseling program only to discover the program can ultimately harm your credit rating, but it can happen. In particular, through a debt management program.

Because one of a credit counseling agency’s chief tasks is decreasing your interest rate, the monthly payments you owe to creditors is reduced. You’re paying a lump monthly sum through the agency, which is then typically dispersed either evenly or by priority. Under the Fair Credit Reporting Act, information about your accounts can stay on your credit report for up to seven years. Your creditors can (and frequently will) report the reduced rate to credit bureaus—taking points away from your credit score.

Keep in mind that when you enter into a debt management program, you’re required to disclose any included accounts, which can cause further damage to your FICO score. Be sure to discuss any potential outcome to your credit with your counselor. If you’re looking to purchase any additional homes in the near future, you may find lenders are going to be less open if they discover you’re in a consumer credit counseling program. And you could also potentially see the interest rate on your current mortgage jump significantly as a result.

List Of CCCS Companies in USA

Is Consumer Credit Counseling Right For Me As A Homeowner?

Whether or not consumer credit counseling is appropriate for you can be largely dependent on the size of your debt. You may find accessing your home equity through a debt consolidation loan ideal if you have substantial debt elsewhere—provided you qualify. You would need a credit rating of at least 620, for example, and a home value of at least 20 percent more than any debt you currently owe. For smaller debts, it may be better to take out a secured loan which isn’t related to any property you own.

Increasing your income is always an option by using some of these money making strategies. However, if you do decide to use a consumer credit counseling agency, do your homework. Make certain they’re registered to conduct business in your state (you can find a list of state-approved agencies here.) While the vast majority of service providers are legitimate and have a well-established history, there have been known to be fraudulent credit repair agencies; typically those requesting fees up front. Non-profit agencies are unquestionably safe, but they can sometimes have prohibitive eligibility requirements—if you’re a homeowner without a U.S. Department of Housing & Urban Development approved loan, for example. Don’t consider this to be a hard rule, however.

Most importantly, ask yourself whether you need a short or long term solution. You may find that even with a monthly repayment plan, the size of your debt is simply unmanageable. The bankruptcy code is there for a reason. If a short term solution to your debt is best and you own a home, speaking with a trusted house buying company can help you stay in your home while you get back on your feet financially. Don’t let your debt spiral out of control. Know both what your options are, but also what you can manage. It becomes a lot easier when someone is on your side to help you make the right choice.