Credit Counseling

Credit Counseling is a debt relief option where clients could potentially benefit from lower interest rates, reduced fees and a lower monthly payment.  Credit cousneling is typically designed for Americans with significant debt burdens who are having trouble making minimum monthly payments.

According to statistics from the Federal Reserve http://www.federalreserve.gov/releases/g19/current/g19.htm, Americans are carrying more than $2.4 trillion in consumer debt, excluding mortgage.  That staggering figure comprises over $700 billion in revolving credit card debt and $1.6 trillion in non-revolving short and intermediate credit debt.

Americans do not share in this debt equally, and the distribution of debt per household varies widely. For starters, about 25% of American families have no debt outstanding.  Of the households that do use credit, the Federal Reserve estimates that 30% of households pay their debts in full each month. That leaves a significant burden on the families burdened by debts, representing the remaining 45% of American households.

Much of this debt is carried at high interest rates. According to a survey by IndexCreditCards.com that surveyed over 50 different cards and a number of credit issuers, the average interest rate for consumer credit cards is 16.82%.  

While some Americans struggling with debts may be able to maintain their minimum monthly payments to their creditors, others are struggling to do so or already behind on their payments. Those who can’t stay current face a hike in interest rates that, in some cases, exceeds 30% annual interest. Once a person is carrying high debt at such an interest rate, paying it off can be next to impossible. Even those who are making minimum payments may feel trapped in a cycle of high monthly payments; they pay and pay as required but their principal balances don’t seem to come down.

Amongst the different kinds of help available to Americans struggling with debt are the services of Consumer Credit Counseling Services, or CCCS firms. If you are struggling with credit card debt and can’t seem to make any headway in paying it off, you should examine credit counseling.

Pros of Credit Counseling

If you are struggling to manage your debts, then credit counseling is worth exploring as a possible solution. Federal law now mandates that all bankruptcy candidates receive credit counseling before filing. However, credit counseling services can also help you long before bankruptcy becomes a possibility. Reputable consumer credit counseling services offer a wide range of solutions tailored to your specific situation. A good Consumer Credit Counseling Service (CCCS) will review your finances, assist you with budgeting tools, and devise a customized program to help you get out of debt.

A Debt Management Plan (DMP) is one specific type of CCCS program. In a SMP program, you make one payment to the CCCS, which then distributes payments to your participating creditors. The main benefit of credit counseling is that it will negotiate lower interest rates for you with your creditors. After interest rate concessions from your lenders and creditors are negotiated and put into place, more of each monthly payment you make goes to pay down your principal balances. This speeds up the time that it takes you to pay off your debt. Because the main benefit of a credit counseling program is lowering your interest rates, it is a better choice for you if you are carrying high-interest debt. DMPs are less effective if your interest rates are already low. Because different credit card companies and lenders have different concession rates so be sure to ask your CCCS representative what your personalized program would look like.

An advantage of working with a credit counseling service is that monthly payments are being sent to your creditors. This means that late payments don’t appear on your credit report and you will not be subjected to aggressive collection calls that occur when you stop paying your creditors entirely.

Fair Share

With most credit counseling services, part of the cost is underwritten by the banks that issue credit cards in a system of payments to credit counseling companies called "fair share." It may seem odd that creditors would pay CCCSs, but they do so because the CCCSs help the banks’ bottom line. CCCS help some financially stressed consumers continue making payments on a regular basis, while avoiding bankruptcy, where the creditors would get nothing. In the past, the typical “fair share” percentage was around 15%. This means that credit counseling services received 15% of all money they paid to creditors on behalf of their customers. However, the average fair share has dropped significantly, to around 2-6% in recent years, as many banks have reduced their fair share payments, and some have stopped them altogether.

Some financial experts see the counselors’ reliance on “fair share” as a conflict of interest between the credit counselors’ obligations to their consumer clients and their need to please credit card lenders, which provide the majority of many agencies’ revenue. In a broader view, if the 'fair share' is disclosed, there does not seem to be any conflict of interest. It should be more important to you how the program can help you, than how the CCCS is compensated. If a credit counseling service can get you out of debt faster and at a lower cost than what you can achieve on your own, then those results should be your focus. Concentrate on the program's out-of-pocket costs and fees and the savings the program delivers, to see if credit counseling is right for you.

Negatives of Credit Counseling

While using a CCCS can greatly speed up the time it takes to pay off your unsecured debt, it is important that you understand that in a credit counseling program you are still repaying 100% of your debts, plus some interest, as opposed to bankruptcy or debt settlement.

Another factor to consider is how much of a difference the CCCS will make in your required monthly minimum payment, when you compare what you are paying on your own and what will be required by the CCCS. Often, in a CCCS, the size of your monthly payment in the program, while lower than paying as you were, is not significantly low enough to be affordable. So, if you are having trouble making your current monthly payment, a CCCS program may not be right for you. The program demands that you make a timely payment each month. If not, you could end dropping out of the program without having resolved your debt problem, delaying your quest to become debt free because you did not find the best debt solution for your circumstances in the first place. Don’t commit to a plan unless you are confident you can make it work.

A good number of people who enroll in CCCS programs drop out before completing the program, mostly because they can no longer afford the monthly payments, which ends up not solving the problem. On average, most credit counseling programs take around five years. Most credit counseling programs do not have a negative impact your FICO score, because payments are sent to your creditors each month on time. However, being enrolled in a credit counseling debt management plan may show up on your credit report and could affect your credit rating during the time you are enrolled in the program.  Trying to finance a major purchase when enrolled in a CCCS will be difficult or will come at the cost of a high interest rate.

Summary

If you can afford a healthy monthly payment, about 3 percent of your total debt each month, are not making any progress in paying down your debt due to carrying high-interest debt, want to protect yourself from aggressive creditor collection actions, and you do not want to go delinquent with your creditors, then consult with a reputable consumer credit counseling service. We have relationships with several leading credit counseling organizations and will be happy to provide their information to you if that is what you decide is best for your situation.