Consumer Credit Counseling
Consumer Credit Counseling services, in the past, have been an effective solution for those who are able to keep up their minimum payments, but due to high interest rates, are not able make any progress toward getting out of debt. The problem is, there are many major creditors that no longer participate in consumer credit counseling programs and will not lower interest rates or offer a reduced payment through a CCC program.
Here is an overview of how consumer credit counseling programs generally work.
Overview of Consumer Credit Counseling
Most credit counseling companies are non-profit because they need to be in order to receive the tax-free "donations" from the credit card companies. This compensation is known in the industry as the "fair share". When you sign up for a credit counseling program, you will be charged a setup fee (typically your first one or two payments), and a monthly service fee (typically $25-$49 per month). Although the credit counseling companies would have you believe that is all they make and that they are non-profit because they are a consumer charitable service, the fact is that they receive most of their compensation through the "fair share" contribution from the credit card companies for signing you up.
Once you are signed up and begin making your monthly payments, often they "forget" to tell you that since your first payment or two goes to fees, your creditors will not get paid for those one to two months at all. This means that if you were current when you signed up, you will quickly become 30-60 days delinquent and will begin getting collection calls. This will also be reflected on your credit reports. If you want to avoid this, you need to pay the entire setup fee up front, in addition to your first month's payment, to maintain current status.
Once your first month's payment has been made, a proposal is sent to each of your creditors asking for participation in a reduced interest rate and payment. Only a fraction of the creditors will accept the initial proposal, and often you will not be informed. Some companies are more diligent than others about re-negotiating the proposal, but the reality is that very few people in credit counseling programs actually see what they were quoted initially.
Another common issue is that the credit counseling companies only send out payments to your creditors once per month on a set date with no regard to when your payments are actually due. Those companies that may have accepted your proposal may often reject it again upon receiving the first late payment, and a vicious cycle emerges. The problem is that these companies are just not geared to handle client cases on an individual level, and this practice has generated some of the highest complaint numbers in the debt solutions industry.
If you do decide to enroll into a consumer credit counseling program, here are a few guidelines to follow:
- 1. Pre-Pay Your Setup Fee
Most companies charge the entire first payment or two as a setup fee. This is not always disclosed and consumers are often suprised to find that their first payment or two did not go to their creditors. If you want all your payments to be on time, you need to pre-pay the entire setup fee in addition to your first month's payment at the time of signup. - 2. Monitor The Approval Of Your Proposals
Track your program and make sure that every proposal that has been rejected is adjusted and re-submitted on your behalf. Often companies will not automatically do this for you, and you may not find out for months that a proposal has been rejected. Each adjustment to a proposal can mean an increase in your payment, so you have to stay on top of it. - 3. Track Your Progress Monthly
Go through your statements every month and make sure your payments were actually made on time by the credit counseling company. It is not enough to assume they will do this for you. If your payments are not received on time by your creditors, they may revoke their reduced payment and interest agreement, and begin adding fees and penalties. This is one of the reasons that credit counseling is seldom effective for getting out of debt.