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Credit Counseling - Part One

Does Credit Counseling Work?

It’s not too difficult to get in over you head where debt is concerned. The best laid plans can dissolve in the face of

layoffs, illness or other unexpected expenses.

When things get really bad, most of us consider credit counseling or bankruptcy. For most of us credit counseling in the more palatable option.

Even those of us set on bankruptcy are required by changes in the law to undergo credit counseling before being allowed to file.

Credit counseling began being offered in the 1960’s, when the National Foundation for Credit Counseling set up a network of local Consumer Credit Counseling Services throughout the country. The goal of the National Foundation is to offer consumers an alternative to bankruptcy.

Traditionally, the credit card industry itself supported these offices, returning to them a Fair Share contribution of about 15% of the money collected by the agencies.

Originally, the creditors would accept the debt management plans drawn up by the agencies, which often called for a total waiver of interest and even a partial reduction of debt. The consumer was charged little or nothing for the service and, if he completed the plan successfully, there were no repercussions to his credit score.

Things have changed drastically in the last few years. Angered over the increase in personal bankruptcies and possibly by efforts of solvent debtors to use these services as a means of reducing their interest rates, the banks have cut back their contributions to these agencies to about 8% and have in many cases refused to help debtors by eliminating interest rates or reducing the amount owed.

The cutbacks in contributions have forced the traditional credit counseling firms to start charging fees to set up and maintain an account, while at the same time reducing their ability to provide quality counseling services.

These traditional agencies acted more and more as ponderous social agencies, out of touch with modern realities. For example, once a debt management program is started, you must pay the agency your monthly payment, which the agency then sends off to the creditors. Many of the traditional agencies require that you obtain a money order and hand deliver it to the office every month. Also they do little over the phone or computer and require face to face meetings.

New, more aggressive counselors, began to appear, many advertising heavily on TV. While some are competent, others are just fronts for private finance companies. Their job is to sell you a debt consolidation loan, not to get you out of debt.

Some kept your first month’s payment as a voluntary contribution without making that fact every clear. Suddenly, already strapped debtors would start to get past due notices with the attendant late fees and credit report damage.

They would be one month more behind.

Other voluntary fees could add hundreds of dollars to your debt repayment plan.

Find more information in part two of Credit Counseling.