Credit Counseling Services
How Credit Counseling Works
Credit counseling organizations are typically non-profit and help consumers negotiate a debt management plan with all of their creditors. Many also provide bankruptcy court-mandated education and financial training to consumers. Similar in analysis to debt consolidation in that the counselor reviews your debts and income to quantify your ability to pay each month, credit counseling differs in that the program does not alter the amount owed or transfer the debt to a new creditor. Instead, credit counselors reduce your monthly debt payments by negotiating a reduction or suspension of interest charged on the delinquent account, albeit sometimes for only a temporary period. However, credit counselors do consolidate the loans in the sense that you make one payment directly to the credit counseling agency each month, and they, in turn, divide that between your creditors.
Many financial experts question whether non-profit credit counseling agencies truly benefit consumers or merely serve as a collection agency for the large credit issuers since they offer nothing more than negotiation services. According to the Better Business Bureau, most credit counseling agencies are partially funded through voluntary contributions from creditors that participate in their debt management programs. For example, Consumer Reports states that in 2008, Bank of America contributed $30 million to credit agencies. This fee income, known in the industry as “fair share,” has been as much as 15 percent of the amount recovered from the debtor; however, in recent years, after outcry over abuses in the industry, fair share contributions have been reduced with most agencies now receiving between 4 and 10 percent.
Benefits and Risks of Credit Counseling
The benefits of credit counseling can be huge. Although some agencies boast of 50 percent reductions in your monthly payments, realistic savings of 20-30 percent can be expected. The agencies do not reduce your debts, however, only the payments. And, because you have to close out the credit accounts under the programs, there is an immediate hit to your credit score; although, after making on-time payments for just three months, your score will begin rising. The other risks are related to the fraud common in all of these industries. Agencies have marketed themselves as non-profit, but were not. Others have charged the typical upfront fees and then closed their doors without resolving their clients’ debts.
Who Benefits Most from Credit Counseling
Credit counseling is best for consumers who are capable of paying their debt given a little help and time. The tougher requirements for wiping out debt enacted under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 means these debtors have no other real choice – a Chapter 13 bankruptcy provides essentially the same reduction in interest rates and monthly payments one can attain through credit counseling.
Understand the Risks of Debt Relief Services
For consumers mired in debt, any solution is welcome news. Unfortunately, that desperation too often has allowed unethical companies to profit unjustly. Each of the debt management options presented here has helped thousands of people escape stifling debt. Many other people have seen their credit ruined, the last of their savings wasted, and the loss of collateral after being convinced to enter into an agreement they could never complete.
Therefore, if you are considering one of these services, investigate several companies thoroughly before making your selection. With the help of an ethical debt management company, you could be debt free in a few short years.