Credit Counselling: Meaning, Services, Benefits, and Drawbacks

Are you drowning in debt and feeling overwhelmed? You are not alone. Millions of people struggle with managing their finances and paying off their debts. But there is hope. Credit counselling is a valuable tool that can help you get back on track and regain control of your finances. The following article will explore everything you need to know about credit counselling, including what it is, how it works, and the benefits it can provide. Go through this article to take the first step to become financially able.
 

What is Credit Counselling?

 
Credit counselling is a financial service that helps individuals better understand and manage their finances and debts. It usually entails working with a professional (credit counsellor), who will review your financial situation, assess your debts, and offer guidance and advice on how to pay them off.
 
During a credit counselling session, a credit counsellor will review your income, expenses, and debts, including credit card balances, loans, and other financial obligations. They will then help you create a budget and a debt repayment plan. The counsellor will also negotiate with your creditors on your behalf for a lower interest rate or a more manageable payment plan.
 
Credit counselling can also provide educational resources and workshops to help individuals understand credit and debt management. It is important to note that credit counselling is typically a non-profit service, and it is not the same as debt settlement or debt consolidation companies that may charge high fees for their service.
 

What does a Credit Counsellor do?

 

1. Debt management

   A debt management plan offered by credit counsellors is a repayment plan that allows you to pay off your debts through a single monthly payment to the credit counselling agency. The agency then distributes the funds to your lenders. The plan typically includes lower interest rates and waived late fees and may also involve consolidating multiple debts into one payment. Credit counsellors work with you to create a budget and develop strategies for managing your future finances. The debt management plan aims to help you become debt-free within a specific timeframe.
    

1. Student Loan Counselling

   Being a parent, you must be familiar with the requirements for completing your child's higher education. The rising cost of education has prompted millions of parents to seek financial assistance from lending institutions to fund their children's higher studies. Lenders provide various products such as personal, mortgage, and education loans to help students study abroad. However, not every financial product suits your needs. Credit counsellors assist parents in selecting the appropriate loan product for an affordable funding amount. They also help with documentation and repayment plan preparation.
    

1. Small Business Counselling

   The business loan market is diverse. You will find various business financing products available in both the unsecured and secured categories. For example, the most common product in the former category is a term loan with a maximum loan amount of Rs 2,50,000. While in the secured category, your options are equipment financing and a working capital loan. Credit counsellors understand your business model and assess your funding needs before recommending the best funding solution.
    

1. Homeownership Counselling

   Purchasing a new home is a significant investment. Most people consider financing options when purchasing or building a home. Several debt products, such as a home loan, a mortgage loan against property, and a personal loan, can help you become a proud homeowner. Each of these products has its own set of advantages and disadvantages. Credit Counsellors can help you decide which product is best for you. They will also recommend ways to save taxes on property-related loans.
    

1. Bankruptcy Counselling

   Bankruptcy should be the last resort for getting out of debt. It has a plethora of negative consequences. Credit counsellors will assist you in understanding all of the benefits and drawbacks of bankruptcy. They might also suggest a better alternative.
    

Does Credit Counselling hurt your credit?

 
No, using credit counselling services does not affect your credit score. The action you intend to take on the advice of counsellors determines whether your score will worsen or improve. For example, if you want to close your loan early, this will boost your credit score. If you ask the counsellors to assist you with debt settlement, your credit report will suffer because of your subsequent actions.
 
Also Read: How to rectify mistakes in your credit report?
 

What are some tips for selecting the best Credit Counselling service?

 

• Find out what services the agency offers and make sure they meet your needs. Some agencies may provide debt management plans, while others might only offer budgeting and financial education.
• Look into the agency's fees and ensure they are reasonable and transparent. Agencies may charge a one-time enrolment charge or monthly maintenance fee for their services.
• Research the agency's reputation by reading customer reviews.
• Find out about the agency's various counsellors' qualifications and check if they are certified and trained in credit counselling.
• Look for an agency that offers personalised financial advice and solutions which will suit your specific needs and situation.

 

Advantages of using a Credit Counselling agency

 

• They can help you create a budget and develop a debt repayment plan.
• They can negotiate with your creditors on your behalf to lower interest rates and fees.
• They can provide education and resources on financial management.
• They can help you avoid bankruptcy or other drastic measures.

 

Disadvantages of using a Credit Counselling agency

 

• Some agencies may charge high fees or have hidden costs.
• Not all agencies are reputable or have qualified counsellors.
• Some agencies may steer you towards debt management plans that are not in your best interest.
• Credit counselling may hurt your credit score if you enrol in a debt management plan.

 

 

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Role of the Reserve Bank of India in Credit Counselling

 
Given the lack of financial literacy in India, particularly in rural and underdeveloped areas, the Reserve Bank of India directed state and union territory-level banker's committees to establish credit counselling centres in their jurisdiction.
 
You can contact the Banking Code and Standards Board of India (BCSBI) if you need credit counselling. BCSBI provides free services on the condition that your current debt is with a BCSBI member bank and the total loan amount is less than Rs 50,00,000.
 

Alternatives to Credit Counselling

 
Disciplined financial behaviour is the only viable alternative to credit counselling. Here are a few tips that will help you maintain a clean financial record-
 

• Automate your payments

  Missing the scheduled due date for EMI is a very common mistake that you can easily avoid. The best thing you can do to avoid missing payments is to set up an automatic debit of your loan EMI on a specific date of the month. 
   

• Review your debt coverage ratio

  Financial crises can strike at any time. However, if you are already paying several EMIs, you should review your credit report regularly. If the ratio exceeds 40, you should consider borrowing from a friend or relative. 
   

• Avoid multiple applications:

  When you submit multiple loan applications simultaneously, credit bureaus receive several requests for your credit report from lending institutions; this is known as a hard enquiry, and it harms your credit report. Always apply with only one lender at one time and wait for their response. If your personal loan application faces rejection, instead of applying immediately, try to understand the reason for rejection.
   

Also Read: Can A Personal Loan Help You Improve Your Credit Score?
 

Conclusion

 
Credit counselling can be a helpful service for individuals struggling with poor debt and credit management. It can provide budgeting advice, debt management plans, and financial education. However, it is crucial to be aware of the potential drawbacks, such as cost and impact on credit score, before you utilise credit counselling services. It is always recommended to do your research and compare different credit counselling services before choosing the one that meets your needs.