CREDIT COUNSELING SERVICES. . .
GOOD OR BAD?
Advertisements abound today for consumer credit services. These counseling
services typically provide financial counseling and debt management plans.
The primary attraction for such programs is that creditors cease charging
interest on the debts allowing the borrower to pay off the principal portion
only and discharge the debt sooner. A peripheral benefit, for some, is that
creditors are prohibited from calling the consumers who sign up for the credit
counseling service. For those consumers who have been harassed by creditors,
being rid of the threatening phone calls can provide great relief.
While this sounds like a "can't miss" type program for consumers
who find themselves over-extended on credit, One needs to recognize the
"down side" of entering such a program, especially if one intends to
seek a mortgage for purchasing or refinancing a home.
Most institutional lenders view the participation in a consumer credit
counseling service much like having entered a bankruptcy, thereby affecting a
borrower's ability to acquire a home loan. Thus, while enrolling in a credit
counseling program might be helpful for getting a handle on one's debts,
consider carefully the long term affects to one's credit rating.
Here are some facts regarding consumer credit counseling and the affect on
home loan financing.
1. Enrollment in a credit counseling program is treated as if he borrower
declared bankruptcy. The reason is that interest on the consumer's debt is
terminated and the borrower simply pays off the principal portion of the debt.
Lenders view this as a "settlement for less than owed".
2. Depending upon the loan program, a designated amount of time must elapse
from the "discharge" date of the bankruptcy. For VA loans, the period
of time from discharge is two years, for Fannie Mae/Freddie Mac loans the time
period is four years. Lenders require the borrower to have "restored"
credit following a bankruptcy or participation in a credit counseling program .
. . meaning that the borrower must have current credit. In all situations, the
credit report must demonstrate one's ability to handle credit with no blemishes
on any accounts after the discharge date. Until recently there were sub-prime or "niche"
type loans that could be acquired with virtually no elapsed time from the discharge
date. Of course, these niche loans carried with them higher interest rates and
less attractive loan terms and have now mostly disappeared from the market.
3. Often enrollment in a consumer credit counseling program requires the
borrower to cancel all credit card usage, although most programs allow the use
of a debit card. The result is that the borrower is on a nearly
"cash" basis with no credit record. This can hinder the restoration
of credit during the consumer credit payoff period. With today's reliance on
credit scoring for loan approvals, borrowers who terminate credit during their
consumer credit contract could be disadvantaged when they want to resume credit
usage.
4. As indicated in #1 above, many lenders determine a borrower's eligibility
based upon the time elapsed from the bankruptcy discharge date. When enrolled
in a credit counseling program, the "discharge" date is calculated as
the date when the debt is paid in full. In other words, if a borrower is in a
four year payment program and want to then seek a Fannie Mae loan, they could
conceivably have to wait a total of eight years before they would be eligible
to proceed.
One final concern with some consumer counseling agencies is reports that
consumer payments are sometimes not made on time by the agency. The result can
be that late payments appear on the borrower's credit report while enrolled in
the program.
Final analysis . . . Consumer Credit Counseling Programs can be a way to
eradicate heavy credit debt, but the consumer may want to explore all other
possibilities prior to entering a program. The companies are called credit ‘counseling”
services because they do provide counseling. You may find other strategies for
dealing with your debt situation than entering the program. If enrolling in the
service seems the most appropriate way to deal with your credit difficulties do
be aware of the potential consequences when you seek a home loan in the future.
Closing Credit Accounts
Web Page/Credit Counseling Services