The Truth About Credit Counseling

Can you afford to get out of debt this way?
by Lisa Sanders

Supporting a family on one income is difficult; even two-income families in the US find themselves carrying an average of $10,000 in credit card debt alone. If your family has found itself sinking, you're not alone. You may be tempted to join a Credit Counseling Service (CCS) for assistance, but before you do, let me tell you about some potential drawbacks of these services.

Charges and hidden fees can add up

I'll start by mentioning the additional money you may be required to spend each month through a CCS program. Seemingly small monthly charges can really cost you over the term of your agreement with CCS, even though the agency itself may not charge them. For example, most services require payment in the form of money order or certified check. A survey of banks in the Washington, DC area found that fees for certified checks could be as high as $13.00. Adding a stamp makes it $160 per year--just to send your payment!

Another surprising fee is the initial deposit required by Credit Counseling agencies. The first month's payment, which is collected as soon as you start the program, is not actually disbursed until your second payment is received. Although this deposit is generally refunded at the completion of the program, it may cause hardship for families having difficulty making ends meet. One man I interviewed had a monthly CCS payment of $865. He forwarded his first check to the counseling agency, but was advised to also make the minimum payments on his credit cards, as his CCS payment would not be disbursed to his creditors until the second month of the program. "If I had the extra thousand dollars laying around, I wouldn't have needed the CCS program," he said.

Who are they really working for?

Even non-profit credit counseling employees need to be paid, and this fee comes from the money you provide to each creditor. A recent Money magazine article states: "Creditors typically pay [CCS] a fee equal to 11% of the amount you fork over to pay off your bills." Although this is standard practice in the Credit Counseling Services industry, it is something you will need to discuss with your counselor. Many agencies also request management fees and/or donations, which are automatically deducted from your monthly payments.

Yet another fee many consumers going through CCS programs may face is the long-distance charges for calling the Customer Service line. One woman in Pennsylvania, who signed up with a Credit Counseling Service through their toll-free number, was later informed that all telephone customer service for existing customers was handled through the main customer service line--which was not toll-free. When her accounts were paid late, she called the main number and waited on hold for nearly 25 minutes while a representative tried to determine what had happened to her payment.

A big negative on your credit report--especially for mortgages

In addition to the hidden fees associated with a credit counseling program, you should also consider the effect this partnership will have on your credit report. For example, a collections agent for a major credit card informed me, "I have had people tell me that they are going through a Credit Counseling Service, but we didn't get a proposal from the service until 6 or 8 weeks later." This means your account may become 60 days past due, even though you've made timely payments to your CCS program. Furthermore, the creditors you include in the program generally note on your credit report that the debt has been assigned to a third party for assistance.

To avoid the accrual of late charges and additional negative marks on your credit report, you will need to call all of the creditors you assigned to the CCS program and change your due dates to coincide with the CCS disbursement. This is not done automatically. You will need to keep a close eye on the credit card statements to make sure there are no late charges assessed while you are on the program. Your CCS agency will generally have these charges reversed after they are identified.

While the marketing agents for the Credit Counseling agencies try to convince you that joining will show future lenders that you are responsible with your money, it may actually have the opposite effect. Nancy Yagich, the Lending Risk Manager for National City Mortgage, told me, "The majority of lenders initially look at joining a Credit Counseling Service similarly to filing Chapter 13 bankruptcy." A loan officer from another leading mortgage company told me that joining a credit counseling service demonstrates a customer's inability to handle his or her own finances. (However, you may still qualify for some loans through high-risk programs, which requires you to pay higher interest rates and make a larger down payment.)

Doing it yourself, with some anonymous help

Credit Counseling Services have helped many people escape the grip of debt, but there are other, better alternatives. Your main focus should not be simply paying off your debt, but changing your way of life. Debtor's Anonymous is a really good place to begin this process. It follows the twelve-step method of other addiction recovery programs, with the focus of not accruing additional debt. Even if you do not join a chapter, you can live the philosophy by joining their online support group at Yahoo! Groups, or reading Karen Casanova's book, Letting Go of Debt, which has daily meditations to help you avoid debt, one day at a time.

Financial counseling is another alternative. These organizations help consumers learn budgeting skills and will teach you how to pay off your debts by yourself. A listing of counselors in your area can be obtained from the Department of Housing and Urban Development website. You may also find a financial counselor in your area by checking your local yellow pages.

There are many books available to help you manage your debt yourself. Titles suggested by people who have "been there" include:

Look for these books, as well as other debt reduction books, at your local library. They will give you the tools you need to be your own credit counseling agency--without any of the potential drawbacks of including a third party.

© 1999-2007 Lisa Sanders, used by permission.


Guest's picture

Wonderful article! Well researched and pulls the cover on "not-for-profit" CCS. Thanks! Doc

Jonathan Tasso's picture

There is a lot of confusion in the credit counseling industry - so much so that non-profit, for-profit, credit counseling, settlement and credit repair agencies are all lumped together as part of the "Credit Counseling Industry". This creates cross over stories, one person has a bad experience with a settlement company and then blames the credit counseling industry in general. While this is understandable from the consumers point of view it is hardly fair. Credit Counseling is completely different from debt management which is different from a settlement program and credit repair... well, credit repair is a process of removing incorrect information from your credit report IF IT IS INCORRECT. There is nothing that can repair your credit if it is bad based on correct information except paying your bills on time and acting responibly with your money. A credit counselor or even a book at the library can tell you everything you need to know to have false information removed from your credit report for free. Everyone should also be pulling there credit reports from which is the real government endorsed "free once a year" credit report website that will not sign you up for a subcription of some kind.

A good credit counseling agency (and counselor) can help identify ways to change your situation for the better. One of these tools is a Debt Management Plan which is a re-negotiation of the repayment of the existing debts between the client and his creditors to get the best repayment terms possible. This potentially means a lowering of interest rates, re-aging of account in order to bring delinquent accounts current, and a consistant payment amount which creates a snowball effect for repayment, paying down the debts faster and faster as the debts become smaller as the payment stays the same over the course of the plan. Typically the cost to run a DMP for the client should be significatly less than what they would lose in interest or fees over the course of the plan. If it does not, then the counselor who plced the consumer on the plan truely did them a dis-service.
As a comment to the effects of a DMP on a clients credit report, it is up to the lender how they wish to view the enrollment into a DMP. For the most part, they should NOT be extending you credit as you are currently trying to get OUT of debt, not incur more. Even if viewed negatively, once completed there are no residual markings on your credit report that haunt you like a bankruptcy will - when its done, its done...
Anyone who needs help should not be scared to call a reputable agency for assistance, but make sure they are a reputable agency! Check the BBB and make sure they are a member of AICCCA or the NFCC! And if a DMP is a proposed solution - do the math and see if it is a good idea or not. If a reputable company proposes it, it is probably in the clients best interest.

Guest's picture

Your link to Debtors Anonymous is a virus

Lynn's picture

It's the legitimate website for Debtor's Anonymous.

Shannon Angell's picture

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Alfred's picture

I made the mistake of thinking that having a bunch of small fees and monthly charges wouldn't hurt, until one day I realized that not only were there those charges, but the hidden fees that went along with them. It immediately became a huge concern, and If it weren't for a credit counselor, I would have had to declare bankruptcy.

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