Like other debt relief solutions, credit counseling has its drawbacks, though most are associated with dishonest or unethical credit counseling services. If you are overwhelmed by debt and facing the probability of default on one or more debt agreements, credit counseling can be a viable and successful solution; however, it is best to be aware of these disadvantages to help you choose which debt relief solution is best for your situation.
Dishonest Credit Counselors Blight a Helpful Industry
The Better Business Bureau receives thousands of complaints about credit counseling agencies each year. The common thread often linking the complaints is deception by the agency. Some agency lies are outrageous – for example, some have claimed to be non-profit organizations when they weren’t. Others have claimed to be a free service, yet they charge fees or have exaggerated the results they can achieve for the consumer.
Investigate any credit counseling agency before meeting with them and confirm that they have actually helped consumers modify their debts. If they are members of one of the industry trade associations, such as the National Foundation for Credit Counseling or the Association of Independent Credit Counseling Agencies, there is a greater likelihood they will conduct business ethically.
Some Credit Counseling Agencies May Have a Conflict of Interest
Most credit counseling agencies receive significant funding from the major credit companies, either directly as donations or grants, or in the form of commissions that are a percentage of your debt payments, called “fair share” within the industry. Fair share payments are typically 4-10%, but can be as high as 15%.
The National Foundation for Credit Counseling even describes the credit companies as “significant constituents” within their mission. Be aware that the fair share fee is often deducted from your payment before it is submitted to your creditors, with the result that less of your debt is paid off. Those payments can also motivate the counselor to get as much money from you as possible to increase their commission amount. Remember that credit counselors are in business, and not all of them may have your best interests in mind.
Hidden Credit Counseling Fees of Some Credit Counseling Agencies
Despite advertisements claiming credit counseling is a free service, it is not. We’ve already discussed the fees earned from your payments. Other fees can be hidden in the fine print of the services contract, or if described openly, mischaracterized as something other than payments to the credit counseling service itself. Examples of these hidden fees include monthly maintenance fees, monthly donations, voluntary contributions, set-up fees, and operating charges.
Higher Monthly Payments
How can this be if the main advertising pitch for credit counseling services is their claim to lower consumers’ monthly debt payments? The reality is that none of the agencies promise how much they will lower the payment, and some creditors refuse to do so. Also, if the agency only lowers your total monthly debt payment $10 but charges you a $20 monthly service fee, they’ve met their commitment, yet your payment increases.
Worse, if they deduct their $20 from your payment to creditors, you do not meet your payment commitment so creditors have the right to cancel the debt management plan, raise your interest rate, and charge fees. However, these are certainly worst-case scenarios that can be avoided by working with a legitimate credit counseling agency with a proven track record.
Low Program Completion Rate
Sadly, the reality is that a very low percentage of consumers complete the debt management plans negotiated by credit counseling agencies, essentially because the monthly payments were not sufficiently reduced. A 2006 report from the National Consumer Law Center stated that “because of inconsistent and reduced concessions, it appears that only consumers with considerable disposable income left over each month are able to get out of debt through Debt Management Programs…(and) a 1999 NFCC memo cited by Consumer Reports found that just 21% of their clients completed DMPs.”
The president of the Association of Independent Consumer Credit Counseling Agencies, David Jones, has admitted that “the agencies affiliated with the AICCCA used to be able to help 20 to 25% of the people who came to them to avoid bankruptcy; now we find they can only help about 7 to 8% of those people.”
If you are having problems making debt payments, and the credit counselors cannot achieve significant reductions in those payments, it is possible that you will not be able to make the debt management plan’s re-negotiated payment for the 3 to 5 year period required to complete the program. If that is the case, debt settlement may be a better solution.
Reduced Access to Credit
Although the major credit bureaus deny that using a credit counseling service affects your credit score, it appears on your credit report for up to seven years, and many credit issuers view it negatively. Because of this they may limit how much credit they are willing to extend to you. Additionally, while using credit counseling services your use of credit may be limited or halted altogether.
Bottom line, while most credit counseling services are legitimate and offer considerable debt relief to consumers needing debt help, it is important to be cautious in choosing the right credit counselor and work with them to create a program you can follow consistently. If you are considering credit counseling, carefully compare its advantages and disadvantages with those of debt consolidation and debt settlement to see which solution is best for your situation.