October 12, 2011
By Stephen Smith
I want to address a simple concept before I begin my article. The reason you work for a living is to make money so in turn you can pay your bills, buy food, keep a roof over your head and hopefully enjoy life. Therefore, it’s somewhat illogical to believe that ANY company with the word “Non-Profit” in their name would not have the same goals as to why you work for a living.
Credit Counseling is a viable debt relief option for those consumers that are having minor issues with their debt. However, if a consumer is having real financial issues, then the option of Credit Counseling falls short of a debt settlement program because it is based on paying back the full amount of debt owed plus additional fees. More times than not, this doesn’t afford the individual enough payment relief to keep them out of a very bad situation. In fact, recently I spoke to a bankruptcy attorney who told me that many of his clients had been involved in a credit couseling program prior to filing bankruptcy. Unfortunate.
A debt settlement program is focused on settling the debt for less than what is owed. If ever a consumer finds themselves in real need of assistance with their debt, then reducing an interest rate is not going to help because the monthly payment will still be too high to manage. A debt settlement program is going to give the consumer the lowest possible monthly payment because it is based on settling the debt at a much lower percentage of what is owed. Instead of paying multiples of your debt due to compounding interest, a reputable company can settle your debt for under 30-40 cents on the dollar.
How do these programs affect your credit score? Any program you choose is going to have some type of affect on your credit. Credit Counseling will not necessarily affect the actual score, but that does not mean it has no affect on your credit report. While in a Credit Counseling program you will not be able to use the cards and it will show up on your credit report as a third party paying your debts. This is an immediate red flag to the banks and the consumer will most certainly be denied a loan or credit. After you have finished the Credit Counseling program there will still be a code on those debts that were in the program. Debt settlement does affect your credit score
because you will be missing payments, but as the debts are paid off the score will gradually move back up. Furthermore, debt settlement is improving your overall financial position by paying these debts off, saving you money and increasing your Debt-to-Income Ratio. (Please understand that a credit score is not the only thing that determines a great financial position with banks or in life.)
“I am the biggest proponent of having a great credit score, but you can have my credit score if it means I can save money, time and now have the ability to replenish my emergency fund or retirement account.” “A credit score does not buy food or keep a roof over my head… Cash is King and you can never have enough of it on hand.” In addition, banks are willing to loan to a consumer with a lower credit score if that means they have a better Debt-to-Income Ratio and other contributing factors.
Facts about Credit Counseling: Credit Counseling is supported financially by the credit card companies themselves. While the idea of a “non-profit” helping people in financial need sounds good and gives you a warm fuzzy feeling inside, the facts are these organizations are subsidized by credit card companies and serve their purposes first, not consumers. So when a consumer is speaking with a Credit Counseling Company whose interest are they really serving? This financial kickback is known in the industry as “Fairshare” and the compensation percentage ranges from 3% to 6% on each debt brought into the program. The good news is that it has come down from the original amount of 12% to 15% compensation. However, since the percentage has come down the Credit Counseling companies need to put more clients into their programs to maintain business when the consumer actually needs a debt settlement program or bankruptcy.
This is how you end up with a situation where only 21% to 25% of people who use Credit Counseling ever successfully complete the program. Moreover, most consumers that enroll in a Credit Counseling program will end up filing for bankruptcy after just 6 months…why? Usually the reason is that it’s too little help for their debt situation and it becomes too late to do anything else. Therefore, these “non-profits” are giving the majority of people they counsel the worst possible advice, and the advice they are giving is exactly in line with the interests of the group who subsidizes them… the big credit card companies.
I understand that Credit Counseling is less drastic and may not have the same immediate effect on your credit than debt settlement or bankruptcy, but statistics show us that it is a false sense of reality because most consumers never complete the Credit Counseling program.
As I mentioned before, if you have a lot of savings and a significant amount of disposable income then credit counseling could be a good choice for you because your situation is in need of just minor relief. This also means you will probably be one of 21% to 25% who actually finish the program. However, if you do not have those things and you find yourself struggling to make minimum payments, not seeing yourself getting ahead or missing payments then I suggest looking at the alternatives of debt settlement or bankruptcy. A lot of people do not want to file or can’t file bankruptcy. Debt settlement is the last option before bankruptcy.
Any reputable company will give you many options to look at. Unfortunately, the credit couseling industry as well as the debt settlement industry have been inundated by companies that may not present you with your best options.
If you’re looking at a debt settlement company,
1. Find a company that doesn’t charge any up-front fees.
2. Find a company that only gets paid after they settle your debt.
3. Find a company that doesn’t have ANY cancellation fees.
This way, as a client, you always know the company you’re working with isn’t taking any debt they can, and IF they take your debt, then they know they’ll be able to settle it for you. Remember: credit counseling doesn’t take all debt, AND you have to be approved for it.
Thanks for reading,
Stephen Smith
858-668-7345
Information was based on The Philadelphia Federal Reserve 2005 report by Robert Hunt “Whither
Consumer Credit Counseling”
http://www.philadelphiafed.org/research-and-data/publications/business-review/2005/q4/Q4_05_ConsumerCounsel.pdf
