Credit counseling involves the creation of a debt management plan (DMP) by the debtor. A credit counselor who works with a consumer/debtor's creditors to negotiate a repayment plan will create the DMP. Frequently, these plans involve a lower interest rate or a lengthier period of time than the debtor would have if working with the original loan or statement. In addition to lowering interest rates, a DMP frequently reduces payments and fees.
After a debtor enrolls in a debt management program, creditors will close accounts or limit future fees. This prevents the debtor from incurring additional debt that must also be repaid. The best aspect of a DMP is that it consolidates a consumer's obligations into a single monthly payment. Although the payment may appear excessive, it is typically less than what the consumer would pay if all bills were paid separately.
Another characteristic is the decline in interest rates. The bank or other creditor will view a consumer as a lower risk if they believe they have a greater possibility of recovering their money. This enables them to reduce the interest rate they charge customers. Reducing an interest rate, which on credit cards can be as high as 30%, enables a consumer to be debt-free in three to six years, as opposed to twenty years or more under normal conditions.
When a consumer establishes a DMP, his or her formerly delinquent accounts are marked as current. After a consumer has made three monthly payments, banks will typically do so. It is an indication that the consumer intends to repay the debt. Additionally, this improves a consumer's credit score. Bills listed as """"late"""" or """"delinquent"""" will remain on a credit report, but they will be offset by """"on time"""" payments.
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