Is Consumer Credit Counseling Really the Route to Take?

Consumer credit counseling and debt consolidation services are often linked together. Generally speaking, consumer credit counseling involves individuals offering advice for improving credit and financial situations for individuals. If the information is legitimate and focused on helping a consumer get out of debt versus selling a consumer a service, this can be beneficial. Consumer credit counseling services often seek to lower interest rates or reduce fees for debtors by working with debtors’ creditors. They create debt management plans, which spell out ways for consumers to eliminate and rid themselves of debt.

Sometimes, consumer credit counseling can really help individuals. These types of companies really can reduce debts—especially ones, which seem astronomical. During this process, creditors will often settle accounts / freeze accounts and accept the small portion of payment they receive.

What’s the catch?

Typically speaking, consumer credit counseling services charge large sums of money up front. When someone is already in debt this can be an issue. Plus, if consumer credit counseling services truly exist to aid individuals and be of help, why do they keep so much of the fees collected to pay off already existing creditors? Many have commented that consumer credit counseling services are nothing more than collection agencies for creditors.

While consumer credit counseling services say they can lower interest rates, they often lower those rates, but also extend the terms out on debts. Instead of paying a creditor off in 6 months, they lower the interest rate by a 1/2 percent and then, extend the period of the bill over 12-18 months. As a result, consumers end up paying much more.

Another downfall of consumer credit counseling services is their credibility. Many of these companies tell consumers to make a single payment to them and then from there they will take care of the rest. Several scandals have unfolded in this way when consumers thought these consumer credit counseling companies were paying their creditors, when in fact they were not. Today, many of these businesses are being investigated and audited by the Internal Revenue Service. Always check the background and with the Better Business Bureau before going with a company of this nature.

Just because creditors reduce debts or accept the little payments, the debtor still owes the debts. While, the debt may eventually get paid, the problem is on the credit report. These long, drawn-out plans take a long time to pay off creditors, and the credit report definitely suffers, as a result. Yes, making good faith payments will help boost the credit score even though too many delinquent accounts are on the report. However, this does not erase the past history of all the late / missed payments. Creditors can change the new status to current, but again, much damage is already done. In addition, the credit report will take a long time to recover. However, maybe this is not even of importance, since debtors’ credit is usually pretty hashed at this point already.

Is a consumer credit counseling service the way to go? That’s up to the individual consumer to decide. However, given the pros and cons of this industry, it seems like one would be better speaking to a financial advisor of sorts or a trust friend / associate. Yes, there are those success stories, which these types of companies have helped; however, those stories seem far and few between. Be careful.

Written by: Rod 01/19

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