Credit Counseling is a process which involves educating the consumers and helping them to avoid getting into debts which cannot be repaid. It is carried out by establishing a effective budget and debt management plan. Credit counseling helps establish a debt relief method by following a debt management plan. It involves negotiations with the creditors in order to frame a debt management plan for the consumer which will help the debtor repay the debts by coming up with a repayment plan with the debtor. The credit counselor usually comes up with a debt management plan with reduced payments, less fees and interest rates for their clients (debtors). The terms of the creditors are usually referred by the credit counselors in order to determine the payments and the interest reductions for their clients in their debt management plans.
After the debt management plan is set up, the customers accounts will be closed by the creditors and there will be some restrictions placed over their future accounts .If a customer defaults a credit card, he will be paying around 30% interest, but upon getting into a debt management plan, the banks will reduce the interest rates or sometimes they eliminate the interest altogether. This will help the debtor pay off his debts sooner. There are commercial credit and debt counseling organizations in European countries, but generally credit counseling comes under social service, provided either by the government, relief organizations, nongovernmental organizations, associations etc.
Few of the services offered by the credit/debt counselors are: help accessing benefits, creating awareness of the regulations, help filing bankruptcy petitions, mediating between the creditor and debtor, providing support to indebted consumers, financial advice and immediate financial support. In the United States, the first credit counseling agency was The National Foundation for Credit Counseling and it was started by the credit granters in the year 1952