Overview of Consumer Credit Counseling (How It Works and What's The Catch)

Overview of Consumer Credit Counseling:

Consumer credit counseling is good for someone who is only slightly over extended in debt and could not get out of debt on his or her own in 60 months or less. Consumer credit counseling agencies are the real non-profit agencies you hear about that work with your credit cards to reduce your interest rates so you can pay off the principal sooner than you otherwise could. This is only an option for individuals and families; small business does not have this option or an equivalent.  Also, credit counseling is only for credit card debt, it cannot help you with other types of type.

How it works?

The credit counseling agency will contact all your credit cards (at least those that are willing to work with the agency) and arrange a lower interest rate (usually about 3-6% when you factor in the back-end fees paid to the agency by the credit card company). The agency will then dictate to you a monthly payment that is needed to pay off the debt, in full, in 60 months or less. Notice that your budget or ability to pay has nothing to do with the monthly payment amount. You will then pay that monthly payment to the credit counseling agency; in turn, the agency will send payments to your various creditors each month.

What’s the catch?

In my experience, by the time someone realizes he is in financial trouble, he is beyond the help of a consumer credit counseling agency. The primary reason is that the payment he will make to the consumer credit counseling agency is not much different than the minimum payments he was previously paying to his credit cards. As such, if the financial challenge is cash flow (which it usually is), then consumer credit counseling is of little use.

Some of the problems with consumer credit counseling are these:

• Credit Counseling is reported on your credit report and it is a significant negative factor,

• Credit Counseling ONLY works with credit cards; if you have other debt issues, credit counseling is of no use,

• Not every credit card participates in credit counseling,

• As mentioned above, the monthly payment is not much different than your current minimum monthly payments,

• The Credit Counseling agency pays your creditors on its timeline, not necessarily by the required due date. Thus, many people see late payments and charges accumulate on their accounts.

There is nothing wrong with exploring your options. If your only debt issue is credit cards and the amount owed is relatively minor, $20,000 or less, and you are barely paying the minimums but are able to meet your other expenses and pay the minimums, then Consumer Credit Counseling may be able to help. However, if you CAN’T even pay your current minimum monthly payments on your credit cards, then credit counseling is a non-starter and you are more likely a bankruptcy candidate. Another factor to consider is your debt to income percentage. If your debt to income is 39% or less, then consumer credit counseling may work for you, but if your debt to income is 40% or more, a bankruptcy is most likely your better option. Debt to income is your [(total credit card debt <divided by> total annual income) <times> 100]. For example, if your credit card debt is $20,000 and your gross annual income is $50,000; your debt to income ratio is 40%. Consumer credit counseling may be an option, but is best for a person or family that has suffered only a minor, temporary set back.