Consumer Credit Counseling Fees & Costs

Debt Consolidation Fees to Watch Out ForFor consumers seeking relief from unsecured debts, out-of-pocket fees for credit counseling are lower than most other solutions. Credit counseling requires almost no upfront costs, while other options such as debt settlement, loan consolidation, and bankruptcy can cost thousands of dollars before you see any results. However, even though a debt management plan can be a relatively inexpensive way to get out of debt, if you consider the long-term costs it’s possible to spend more money getting out of debt using the debt management plans developed by credit counseling agencies than other solutions.

Overall, the costs for credit counseling should be reasonable, as long as you do not fall for the aggressive marketing of one of the less ethical services that have plagued the industry. Rogue providers have overcharged consumers with hidden fees, advance fees, and monthly account management fees. Most reputable credit counseling agencies are non-profit and charge consumers very reasonable fees.

Industry Standard Fees and Costs for Credit Counseling Services

If your income and debt levels meet the requirements to qualify for credit counseling, your out-of-pocket costs should be minimal. Credit counseling agencies that are members of either of the two leading trade associations, the National Foundation for Credit Counseling (NFCC) and the Association of Independent Credit Counseling Agencies (AICCA), must maintain a low cost structure according to their association’s bylaws. For example, the AICCA requires that:

“Fees, voluntary contributions, or requested donations from clients for the enrollment into a Debt Management Plan (DMP) do not exceed the lesser of $75 or the maximum fee allowed by law in the state of residence of the client, and that fees, voluntary contributions, or requested donations from clients who are on a DMP do not exceed the lesser of $50 or the maximum monthly fee allowed by law in the state of residence of the client. This restriction includes all programs provided by the agency (whether provided directly or from any source) on an ongoing basis while the client is on a DMP.”

Monthly Account Management Fees for Credit Counseling

Credit counseling agencies typically charge a monthly account management fee for the duration of the time you are in the program. Most agencies calculate the fee by taking a base amount, commonly $15-$25 and adding a small fee of $3-$5 for each credit account under management. Those per account fees are eliminated as each account is paid off.

Beware of Credit Counseling Services that Charge Hidden Fees

Many agencies strongly “suggest” that you make a “voluntary contribution” or “donation” to their non-profit organization. Their motivation is the different treatment of contributions versus earned income by the IRS. To the consumer, however, a voluntary contribution it is nothing more than a hidden fee. If you refuse to contribute, you will often be charged an initial fee that is not hidden.

Although technically not a fee charged to you, Fair Share payments the agency receives from the credit companies you owe is the same as a hidden fee. Fair Share payments are calculated as a percentage ranging from 4%-15% of the money collected by the credit counseling agency from you. The creditor kicks back that percentage to the agency from each payment received under the debt management plan. If the Fair Share payment is subtracted from your payment before it is applied to the account balance, the principle is not reduced as much as it should be. In that case, the Fair Share payment is, in effect, a hidden fee.

The Long-term Costs of Credit Counseling

If your credit counselor isn’t able to secure lower interest rates or a reduction or elimination of fees charged by your creditors, the DMP could end up costing you more in the long run. This is especially true if the creditor will only agree to simply lowering the minimum monthly payment for a specified period. In this instance the interest continues accruing as before and the principle isn’t paid down as fast, which increases the overall cost.

More significantly, compared to debt settlement and bankruptcy, which reduce or wipe out total debt, the debt management plans promoted by credit counseling agencies require that you pay back all debt. While lowering the interest rate does reduce the amount you would have paid under the original debt agreements, lowering the minimum payment as well increases that amount by extending the time it will take to pay off the loan with the effect that more interest will be charged over that time.

Compare Credit Counseling to Other Debt Relief Strategies

When considering debt relief solutions, your particular financial situation limits the options available to you. The lowest overall cost to resolve outstanding unsecured debts is usually achieved with a debt settlement or Chapter 7 bankruptcy strategy because those alternatives eliminate or significantly reduce the debt principal. However, creditors may refuse to discuss debt settlement if they believe you have the potential to repay the entire debt. Investigate each option before choosing the one that is best for you.