Why consumer credit counseling is required?

Credit, in today’s world of market economy is the vital catalyst for economic growth. Effective management of credit is of utmost importance as credit is the driving force that accelerates the growth of market economy. Customers should be aware of every pros and cons of the credit they are availing. Credit counseling is the process of educating the consumers about how to escape from incurring debts which has least chance of repayment.

Credit counseling in strict sense is not different from debt counseling. Often credit counseling is related to the preparation of a debt management plan for the consumer after negotiation with the creditor. Preparation of debt management plan involves classification of all the debts, assessment of income and budget, renegotiation of interest rates for the payment of personal unsecured debts. DMP aggregates a number of small monthly payments to one which is less than the total amount of monthly repayment. DMP also reduces the rate of interest charged by the creditors. Credit counseling guides, educates and provides necessary information to the customer fostering a smooth credit management system.

NFCC or the National Federation for Credit Counseling was the first one to start credit counseling in US in the year 1951. This concept caught the attention of the whole world quickly. With the progress of time their number mounted. These organizations are playing a vital role in credit education and information. The growth dynamics of world economy has necessitated the popularization of credit counseling.

Credit counseling may be ex ante or ex post depending upon its nature. Ex ante counseling deals with educating the borrowers about the stability of their income and reduces the chances of default in repayment. Ex post counseling is required when a customer misses one or several installments of repayment with the sole aim to avoid the chance of non-payment or default or foreclosure. In practice, credit counseling is of ex post nature. Ex post credit counseling includes crisis management, budgeting and exploration of mid-term alternatives to avoid the situation.

Efficient credit counseling helps the consumer to avoid his financial crisis and in solving his current financial problems. It also helps in diminishing the chances of misuse of credit to ensure that the financial management system can develop a realistic spending plan. Credit counseling makes structured financial market more accessible and customer friendly. Recovering the financial health of the consumer may be a time consuming work, but effective credit counseling saves him from further financial hazards.

Credit counseling increases the level of financial literacy, hence fostering sound economic growth. Borrowers learn more about the financial market by credit counseling which encourages them to behave strategically and rationally while dealing with credit.