Many Consumer Credit Counseling Companies tout their non-profit status and many consumers confuse "non-profit" with "no charge for services", or charity. Non-profit Consumer Credit Counseling Companies may still make substantial amounts of money. The way Credit Counseling works is that you typically meet with a Credit Counselor who analyzes your unsecured debts, other obligations, and your monthly income. They will then formulate a monthly budget and present a plan to you that includes lowering of some credit card interest rates and sometimes, the monthly payment. The Credit Counseling Company then contacts all your creditors and requests that you be permitted to repay the debt at a lower interest rate. During the program a single monthly payment is sent to the Credit Counseling company and they in turn make payments directly to all your creditors for the next 48 - 72 months.
What you are not told is that the Credit Counseling companies act as a surrogate of the Credit Card Company. They make most of their money from "donations" from your Creditors based on the amount they "collect" from you while in the program. This is an arrangement very similar to the way collection agencies are paid by creditors. Since credit counseling companies rely on payments from the credit card companies, they do not truly represent the consumer. However, there are good credit counseling companies out there and credit counseling may be the right option for you if you do not have a true financial hardship -- research them carefully to make sure their services make sense for your situation.
The downside to Credit Counseling is as follows:
- In a Credit Counseling program you pay the full amount of debt owed and sometimes the interest rate is lowered only nominally or not at all.
- Credit counselors don't always make timely payments resulting in late fees and a derogatory credit history.
- Not all Creditors agree to reduce your interest.
- Payments are still high and it typically takes 5 or 6 years to pay off the debt.
- Most Credit Counseling programs have a high failure rate.
- Many of these companies are funded by your creditors.
- Credit Counseling may appear on your credit record. This is viewed negatively by most lenders and may hinder your ability to refinance a home or get a loan.
