Introduction
Credit counselling services are essential services in the financial market as they assist people with financial problems and get out of an immense amount of debt. Given the fact that the financial world continues to evolve knowledge of how to handle an individual’s finances is essential in the contemporary world. Credit counselling is designed to offer important information advice and assistance to consumers.
In need of assistance in eliminating their debts preventing their bankruptcies and reestablishing their economic stability. Credit counselling is thus defined as needing to rise due to an increase in consumer credit and household debt levels. As credit is more easily available there will be a corresponding greater likelihood of credit risks including financial calamity. Credit counselling is provided by credit counselling agencies that act as middle men who provide consultation services to those who want to rebuild their financial status.
This article aims to evaluate the nature of credit counselling in connection with the field of finance describe the history of and the processes involved and analyse the advantages and disadvantages of such activity for society.
Historical Development of Credit Counseling
The history of credit counselling dates back to the early part of the 20th century as a result of increased use of consumer credit and thus high incidences of indebtedness. Subsequently non profit organisations and community groups started coming up to provide financial help and consultancy for people in debt. Modern organised credit counselling dates back to the mid twentieth century with the formation of the National Foundation for credit counselling (NFCC) in the United States of America.
Credit counselling has adjusted for socio economic shifts the World Great Depression post World War and post World War II economic boom and the credit crunch of the late 1900s and the 2000s. This event promoted the urge to manage debts and financial literacy which contributed to the development and emergence of credit counselling agencies.
In the modern world the credit council is an independent agency that provides consumers and their debt management with a diversified choice of services all over the world. Credit counselling is a dynamic profession that has been defined or altered by the shift of customer preferences policies and the introduction of new technology.
Interpretation with regard to Personal Finance
Credit counselling is essential in credit management especially for those who have a challenge managing their debts. The goals of credit counselling are primarily meant for the clients to gain the necessary knowledge about their in debted status set up a plan for its eradication and set the basis for a financially responsible life.
Understanding Personal Debt
The credit counselling process starts with an evaluation of the credit status of a particular person. This involves working out income expenditures loans and credit report exercises. The means for achieving this is to create a coherent picture of the client’s financial status that would reveal the causes of his financial difficulties.
Budgeting and Financial Planning
Budgeting and financial planning are some of the key services that credit counselling agencies are supposed to offer. In this aspect counsellors assist the clients in developing an achievable budget and understanding their earnings and expenditures. This process assists people in regaining control and being in a position to manage their financial resources without more emphasis on expenditures than the amount they value or the need to save.
Debt Management Plans (DMPs)
For instance for those with huge debt credit counselling agencies advise clients to embark on a DMP. A DMP is a formal way of paying back debts whereby several balances are compressed into a singular regular payment. Credit counsellors discuss with the creditor how to lower the interest rates and the fees thereby allowing the payment of the debt. A DMP takes 3660 months and is owned by the clients making periodic instalments to the credit counselling agency that in turn pays the amount to the creditors.
Credit Education and Awareness
Credit counselling is also a community service where clients are advised on matters to do with credit and money management. This includes education on how credit works the importance of the credit score and how one can avoid future credit related ills. Therefore a part of credit counselling is education which is an attempt to assist people in avoiding the same traps in the future.
Benefits of Credit Counseling
Credit counselling has a number of advantages for people who have developed a problem with debt and poor financial management. Some of these advantages go even beyond the alleviation of the financial pressure on the client in the short run to enhance their financial situation in the long run.
Improved Financial Literacy
Another advantage is however in the area of education on the optimal utilisation of credit and managing of finances. Clients learn about their finances and how they are able to handle money personal or business for example matters concerning budgeting credit cards and various scams. Such information is helpful for making decisions and saving and investing money for long term goals.
Reduction in Debt
Credit counselling entails offering guidance to the borrowers to assist them in managing their debts through techniques like formulation of a project to merge all their debts into a single one and negotiating the amount of money that they have to pay their creditors. To many clients putting DMP implies a constant reduction of their debt something that makes it easier to develop a strong financial foundation.
Stress Reduction and Mental Health Benefits
It is clear that economic pressure plays one of the most critical roles in the concern and can create a weak health condition of the brain. Credit counselling gives people an orderly method of handling their liabilities and this is seen to reduce the amount of pressure that one has to go through in order to make payments due to uncertainty. The mere fact of having a clear vision of how to handle debt is more than enough to help elevate one’s mental health and quality of life.
Long Term Financial Stability
Therefore the aim of credit counselling is usually to plan towards the achievement of concise and realistic long term objectives of financial freedom. It therefore gives the necessary tools and knowledge regarding finance that enable the clients to take financial power into their own hands through credit counselling. These comprise amassing assets enhancing financial status and general planning for future occurrences like retirement among others.
Procedure of credit counselling
The credit counselling process generally follows several important steps which are scaled to help clients with their credit issues and aims.
Initial Consultation and Assessment
The process starts with an appointment whereby the credit counsellor interviews the client with a view to evaluating their status. This entails evaluating incomes expenditures loans and credit status. Also depending on the case and need the counsellor may talk about the financial aspects and issues the client might be having.
Developing a Customised Financial Plan
Upon evaluation the credit counsellor discusses with the client an individual or personal plan of action. Such a plan may involve managing the budget clearing debts and managing credit. If the creation of a DMP is advised the counsellor will tell the client about the stipulations and inform the client about the obligations implied.
Implementation and Monitoring
Therefore once the financial plan is established the client starts to execute the strategies that have been laid down. The credit counsellor gives constant followup and supervision so that the client remains consistent and makes necessary changes when necessary. Sessions help the client to remain on track for their financial objectives.
Ongoing Support and Adjustments
Credit counselling is therefore more than just a one time assistance because the credit counsellor may have to accompany the client throughout the way. These may involve the evaluations of the financial plan more than once amendment of the previous plan due to the alterations in the client situation and recurrent training in the financial area.
Two forms of Credit counselling services
Credit counselling services can be classified by the following sub categories where every type is created with a view to addressing certain types of problems. To this end consumers must be aware of the various forms of credit counselling so they may select the most appropriate service.
General Credit Counseling
This type of counselling is general counselling where persons are advised on how to handle their finances and avoid accumulating unhealthy debts. The following people will benefit from it. This intervention is ideal for those who have made some financial messes and now desire to look for a way forward.
Housing Counselling
Housing counselling entails assistance in matters concerning homeownership and includes mortgage payments foreclosure and rentals. An often underutilised source of knowledge of the current aspects of the housing market and its trends and thus rates can be obtained from housing counsellors who can help the clients better understand their housing situation and make informed decisions about it.
Bankruptcy Counselling
Bankruptcy counselling is mandatory for any person who is planning to file for bankruptcy. It involves two stages pre filing counselling and pre discharge education. The aim is to avoid signing for bankruptcy by making people appreciate its consequences and other available options.
Student Loan Counseling
Since the cases of student loans there are professional organisations with personal who will assist in tackling student loans. This entails helping in comprehending the available loan repayment plan knowing about the loan forgiveness programs and coming up with the best student loan payoff plan.
Challenges in Credit Counseling
Although credit counselling has numerous advantages it also has a list of challenges. Such factors may affect the efficiency of credit counselling services as well as the chances of people getting the required help.
Stigma and Misconceptions
Credit counselling is not popular among creditors due to social prejudice that is associated with one seeking assistance in managing their debts. Most individuals do not undergo credit counselling because they feel that it is unbecoming of them or embarrassing. Further misconceptions about what credit counselling entails are a bar to receipt of these services that are often overlooked.
Financial Literacy Barriers
Credit counselling requires individuals to appreciate personal finance thus those who lack this basic knowledge are likely to benefit little from credit counselling. Some of the clients may be in a position NOT to grasp the details of what the counsellor is advising them to do or lack the requisite knowledge to enable them to put into practice the various financial strategies that the counsellors are advising them to embrace.
Accessibility and Affordability of Services
Some credit counselling services are free however they are provided by non profit organisations and there are several restrictions to them. Some of these limitations may include where the service provider is located the language that the service provider uses and the cost of the available services. Some people will be discouraged by the fees that are charged for credit counselling even when these fees are very small.
Regulatory and Ethical Issues
The credit counselling industry is supervised but problems of unethical behaviour exist especially among for profit organisations. Some of the problems include unnecessary shrouded charges false representations and self interest which erode consumers trust in credit counselling.
Effects of Credit Counseling on Society
Counselling on credit has more significance in influencing the economy than the mere management of peoples credit status. It fosters economic stability provides a less costly channel of financing during financial distress and cuts across people in need in society.
Reducing Bankruptcy Rates
As credit counselling offers other options as an alternative to bankruptcy the incidence of bankruptcy is less likely to happen. This has a push factor on the economy since it offsets the social cost that is normally incurred by those who file for bankruptcy for instance being locked out of credit markets.
Promoting Economic Stability
Counselling helps consumers control their current debts hence it augments general economic stability due to a reduction in further vulnerability to credit crunch. If our people are financially secure then they are in a position to inject into the economy by way of consumption savings and investment.
Enhancing Social Wellbeing
The inability to cater for financial needs can prove fatal to society by causing stress relationship breakups and mental health disorders. Through solving financial issues credit counselling enhances the standard of living to a healthier and more stable society.
Supporting Vulnerable Populations
Credit counselling is particularly significant for sensitive individuals including low income earners senior citizens and those who experience contingencies in their financial lives. Such groups are usually financially and knowledgeably incapable of managing their finances and that is why credit counselling is such an important service.
Credit Counseling and Debt Management
Credit counselling provides consumers with helpful services which is why it is usually compared to other kinds of debt relief including debt settlement and debt consolidation. Despite the fact that all these approaches have similarities in the way they are implemented and realised the approaches are different.
Comparing Approaches
Credit counselling is centred on enabling a client to overcome a financial crisis emerging from debts through a combination of education budgeting and agreed financial management programs. Debt settlement entails agreeing with the creditor so that they agree to accept a lower amount than is owed in full settlement. Consolidation of debt is a process whereby an individual is given a new loan with which he will clear all his debts thereby paying only one monthly instalment.
Advantages and Disadvantages
In credit counselling the debtors financial knowledge is enhanced and lasting assistance is given to them but it may sometimes take a longer period to solve the debt problems in contrast to debt settlement. Although debt settlement can help achieve debt relief in less time it will bring down credit scores and costs more. On the one hand WRM can be a way of streamlining debt repayment on the other hand it is only possible if one is in good standing with credit agencies.
Situations for Each Approach
All three choices of credit counselling debt settlement and debt consolidation depend on the situation of the person their financial aim and inclination. Credit counselling is usually the most appropriate if one cannot balance their finances and does not wish to suffer the ramifications of debt negotiation or integration.
Debt settlement might be appropriate for consumers with substantial amounts of unsecured debts who are unable to meet their monthly payments. Debt consolidation is suitable for people who have more than one loan and a good credit reputation and who want to merge their debts into one that is easier to pay.
Case Studies and Success Stories
Counter examples of credit counselling help the consumer grasp the probable degree of efficiency of such services. Shedding light on the effectiveness of credit counselling below are a few case studies that describe how credit counselling has assisted people in coming out of pitfalls and achieving their intended goals.
Case Study Overcoming Credit Card Debt
Janes situation She is a single mother with three school going children and has been trapped with $20000 credit card debt which was built up after several medical emergencies. She took further steps to register in credit counselling and the process was able to lower her high interest rates and even have all her debts paid through a single monthly instalment. Within four years she cleared all her liabilities and had a good standing which helped her secure a mortgage and own a house.
Case Study Avoiding Foreclosure
Tom and Susan were consequently facing the possibility of being homeless after Tom was laid off at work and therefore missed their mortgage payment. Because of this housing counselling they were able to get a loan modification from their lender where they were able to make lesser monthly payments and thus avert being thrown out of their home. The same counselling agency guided me in the preparation of a budget for other expenses as well as setting up an emergency fund.
Future of Credit Counseling
Certain trends will alter the face of credit counselling in future through technological development shifting economic systems and consumer requirements. With the growing complexity of the financial industry credit counselling agencies are also gradually changing the way their support could be effective in digitization.
Technological Advancements
Credit counselling is a couple of services that are steadily being impacted by the application of technology. Technological advances in the form of social media applications and software help clients get credit counselling or financial planning services. They also change the nature of counselling as data analysis and AI can be applied making financial consultations as unique as the clients.
Role of AI and Digital Tools
The use of information technology and artificial intelligence in credit counselling is becoming very relevant. Synthetic assistants chatbots and virtual counsellors give timely information and support while the integrating tools help an individual control his account. They help to make credit counselling more easily available and more effective at least for the sorts of consumers who are comfortable with using technology.
Conclusion
Credit counselling is an important part of the financial experiences of people who use the services of counsellors to manage their debt and receive useful advice. Credit counselling helps people regain control of their economic situation by enhancing their knowledge of money management and minimising their debts so that they can maintain their financial wellbeing.
This is why credit counselling is going to become even more relevant as the financial market changes further. The future of credit counselling will depend on the successful integration of those changes within the sphere of technology economic state needs of clients etc. Accepting these shifts and still offering quality uniting services credit counselling can contribute to the goal of reaching sound and solid subscribers as well as society.