Credit Counseling was actually created by your credit card companies. Initially, it was a way for them to recover money from people who were not making payments. Instead of losing that money or spending more money (through collections and lawyers) to try and recover it, they created a "safe" place for a consumer to go so they still get something. Actually, they get all of their initial money and interest. Not bad. It has now evolved into a billion dollar industry.

Credit Counseling is one way to get out of debt. Normally, a credit counseling company will negotiate a reduced interest rate on your credit cards (your creditors would have to accept this proposal and may not reduce the interest rate at all, it all depends on your financial situation and the credit counseling companies relationship with your creditors). On average, you can expect to pay back your entire balance at 8-12% interest. Again, this is not a promise but a general guideline. When speaking with a credit counseling company, they should give you the exact terms and conditions before you retain them. They will also try to have late payment and over-the-limit fees forgiven. This generally takes place once you've established a six-month track record of good payments.

Credit Counseling companies make their money several ways. First, don't be fooled about non-profit status. All that means is that at the end of the year, the company shows no profit. They still get healthy salaries; spend advertising dollars to get clients (just like for profit companies do). Also, non-profit status does not indicate honesty, integrity or even reliability.

Credit counseling agencies normally charge a set up fee and monthly fee (they will describe this as a "contribution"). They also receive what is referred to as a "fair share". It basically works like this. They set up a relationship with several creditors. When they set you up on monthly payments (remember, you are paying the balance and interest) to that creditor, they will receive a percentage of what they recover from you.

In order for credit counseling to work, you must have sufficient income to pay your basic bills and to make sure you don't miss a payment to credit counseling company. You should make sure that your payment arrives in time in order for the counseling company to disburse the payments to your creditors. Otherwise, you may be charged additional late fees and other charges, in addition to adversely affecting your credit profile. You must stay in this type of program until all of your bills have been paid in full, plus interest.

This option is reported to the credit agencies stating you are not able to handle your financial affairs. The agency or company will be reported monthly on your credit report as a third party facilitating in your repayment of the debts enrolled. Your credit worthiness is called into question and is often considered as serious as a bankruptcy.

Consolidation

There are a couple of approaches to consolidating debt. Credit card companies suggest transferring debt from multiple cards to one card at a lower interest rate. This is in effect transferring unsecured debt to another unsecured debt instrument with no tax benefits. Not only are you still carrying the same amount of debt but also, if you miss a payment, your interest rate will go up. Believe it or not, most consumers will end up using the other credit cards that now have a zero balance and the cycle continues all over again. Truth be told, this is what the creditors want you to do so they can make more money. They know that people will not change their spending habits and they will continue to reap the billions of dollars in interest for years to come.

Homeowners with equity may find it more advantageous to take out a home equity loan, if you even qualify. In the process, unsecured debt becomes secured and therefore you may get some tax advantage. You may maintain your good credit while lowering your payments; however, you are now taking an unsecured debt and putting your home on the line. If you miss your payments or heaven forbid something happens to you and you can't make your payments, you may loose your house. In addition, most people won't get rid of the credit cards that they just paid off and again, they will find themselves charging on the cards and owing all over again. Never trade unsecured debt for secured debt unless you know that you will not use those credit cards again