Credit Counsellors & Debt Consolidators

These companies have started popping up everywhere.  In fact, as I am writing this book, there is a commercial on television for yet another credit counselling company.  It seems like they are everywhere.  It also seems like they can really help you with your debt problems.  But can they? 

There are some credit counselling agencies and debt consolidators that can actually help get people out of debt.  But there are also others who are simply trying to get money (that you don’t have) without helping you at all.

There is a difference between these two types of companies.  Credit counsellors will help you get out of debt and stay out of debt.  That means that they will help you realize where you went wrong on the financial road and then help you get out of debt.  After that, they will put you on a budget and offer services that can help you stay out of debt and live a financially stable life.

Debt consolidation companies are different, though not entirely.  They also will help you get out of debt, but they do so by working with your creditors to help combine all of your debts into one large debt with one monthly payment.  That usually entails getting some type of loan on your behalf that will pay off your creditors and you will pay the loan company instead.

Because of the services they provide, many people would rather go with a credit counselling service.  That’s because they need someone to help them stay away from the mindset that got them into debt in the first place.  There are many, many credit counselling companies out there. 

What do you need to look for in a reputable credit counselling company?  Here are a few suggestions: 

• They should be associated with the Better Business Bureau.  The service's website should have a BBB logo and a link to their record on the Better Business Bureau website. Click through the link to check that there are no unresolved complaints against them. 

Many people only think about the Better Business Bureau after they've been cheated, but by then there's not much you can do. Working with a credit counselling agency that is a member of the Better Business Bureau means that you can go to them to help mediate any dispute you might have with the service provider.

• Reputable credit counselling services will be accredited by an independent non-profit, just as many schools are. One such accreditation body is the National Institute for Financial Counselling Education. 

• A good credit counselling agency will charge a small, reasonable monthly fee, usually around $30. Some also charge a fee upfront, though this fee should be reasonable (around $50 tops). It may be possible to get a hardship waiver of these fees if you truly do not have the $30-50. 

• You will have to fill out an application when you decide to go with a credit counselling agency.  The application must clearly say what the fees to be paid are, what the services to be provided are, and in what timeframe all of this will be provided. 

• Run far, far away from any organization that proposes to "wipe out" your debt for you, rather than simply helping you to repay the debt. Short of your creditors just deciding to forget about the debt (unlikely), there is no way to erase debt–even bankruptcy leaves a huge mark on your credit report for ten years. 

True, your car may not go missing from your driveway if you stop paying unsecured debt (i.e., debt that is not "secured" with collateral, like most credit cards, unlike most auto loans). But you are still legally obligated to pay the debt, and the possibility of being taken to court will loom over you. You will likely be unable to get even "bad credit" financing if you still have debts in collections–good luck buying a car or house.

Now let’s look at how a reputable credit counselling service will work.  First, they will negotiate with your creditors to establish a debt management plan (DMP) for you.  A DMP may help the debtor repay his or her debt by working out a repayment plan with the creditor. DMPs, set up by credit counsellors, usually offer reduced payments, fees and interest rates to the client. Credit counsellors refer to the terms dictated by the creditors to determine payments or interest reductions offered to consumers in a debt management plan.

After joining a DMP, the creditors will close the customer’s accounts and restrict the accounts to future charges.  The most common benefit of a DMP as advertised by most agencies is the consolidation of multiple monthly payments into just one monthly payment which is usually less than the sum of the individual payment previously paid by the customer.

This is because the credit card banks will usually accept a lower monthly payment from a customer in a DMP than if the customer were paying the account on their own.  Some DMPs advertise that payments can be cut by 50 % although a reduction of 10 to 20 percent is more common.

The second feature of a DMP is a reduction in interest rates charged by creditors.  A customer with a defaulted credit card account will often be paying an interest rate approaching 30 percent.  Upon joining a DMP, credit card banks sometimes lower the annual percentage rates charged to 5 to 10 percent and a few will eliminate the interest altogether.

This reduction in interest allows the counselling agencies to advertise that their customers will be debt free in periods of three to six years rather than the twenty plus years that it would take to pay off a large amount of debt at high interest rates.  That’s a very attractive advantage – especially for people who are in debt quite a bit.

A third benefit offered by credit counselling agencies is the process of bringing delinquent accounts current.  This is often called “re-aging” or “curing” an account.  This usually occurs after making a series of on-time payments through the DMP as a show of good faith and commitment to completion of the program.

For example, a client with an account that has a monthly payment of $50 but that monthly payment has not been paid in two months might be considered by the creditor to be 60 days past due.  After joining the DMP and making three consecutive on-time monthly payments, the creditor could “re-age” the account to reflect a current status.

After that, the monthly payment due on the statements would be the monthly payment negotiated by the DMP and the account would be reported as current to the credit bureaus.  Now this process does not eliminate the prior delinquencies from the credit reports. 

What is does is merely give a fresh start and opportunity for the client to begin building a positive credit history.  Like all negative credit information, only the passage of time will lessen the impact of the negative marks when credit scores are calculated.

So how do credit counselling companies make money?  They do charge a fee to you for their services, and it is important for you to get all of that information in writing before you sign on the dotted line.  However, this fee is not usually enough to make them a huge profit. 

The credit counselling companies make most of their compensation from the creditors to whom the debt payments are distributed. This funding relationship has led many to believe that credit counselling agencies are merely a collections wing of the creditors.

This fee income, known as “Fair Share,” consists of contributions from the creditors that originally earned the agency 15% of the amount recovered. However, in recent years, Fair Share contributions have dwindled steadily, with contributions of 4-10% being the most common.

There is a lot of criticism, in fact, when it comes to credit counselling agencies and their effectiveness as well as legality.  The Federal Trade Commission has filed lawsuits against several credit counselling agencies, and they continue to urge caution to consumers when it comes to choosing a credit counselling agency.

The FTC has received over 8,000 complaints from consumers about shady credit counselors.  Many of those complaints concern high or hidden fees along with the inability to opt out of so-called “voluntary” contributions.  The Better Business Bureau also reports high complaint levels about credit counselling.

Not surprisingly, the IRS has also weighed in on the subject of credit counselling and has denied non-profit, tax-exempt status to around thirty of the nation’s 1,000 credit counselling agencies.  Those thirty agencies account for more than half of the industry’s revenue.  Audits of non-profit credit counselling agencies by the IRS are ongoing.

The lobby against credit counselors arises from the belief by the collection industry that the not-for-profit status of the credit counselors gives them an unfair financial and market advantage over them.  The IRS apparently agrees.

The tax exempt revocations seem to be centered on whether or not a tax exempt credit counselor actually performed their mandated mission by assisting the community at large as opposed to offering their whole attention to their own DMP customers in a “collection practice”.  However, that has yet to be proven.

Congress has also investigated the credit counseling industry and has issued a report that says while some agencies are ethical, others charge excessive fees and provide poor service to consumers.  The report also states that NFCC member guidelines, if applied to the entire industry, would go a long way toward eliminating the abuses they have uncovered in other parts of the industry.

When it comes to debt consolidation companies, you are talking about an entirely different concept.  What a debt consolidation company does is negotiate with creditors to get a lower pay-off amount for your debts and then obtain a loan on your behalf to pay off those creditors allowing you to make just one payment instead of multiple ones.

The two types of companies are similar in nature, but with debt consolidation, the only thing they do is negotiate with credit lenders and then get you one payment instead of many.  They do charge a fee for their services as well just as the credit counselling companies do.

The thing about debt consolidation companies is that they do what you can do yourself with just a little bit of work.  You can call your creditors and negotiate a pay-off balance for your accounts and then obtain your own loan as a debt consolidation loan.  Even if you have less than perfect credit, most banks and lending institutions will have debt consolidation loans available to almost everyone.

Really, the bottom line when considering either a debt consolidation company or a credit counselor is to weight the advantages and disadvantages first.  Then check out the company you are considering to make sure they are reputable. 

These types of companies can really and truly help people who are seriously in debt.  But proceed with caution and choose wisely lest you get yourself involved in yet another problem besides your debt!

Now that we’ve addressed no credit, bad credit, and people who can help with credit problems, let’s focus on your credit report and your credit score.  Often, there are mistakes that are on your credit report, and correcting them is essential.