Credit Counseling companies offer counseling and advise as to budgeting and money management. They represent themselves as “non-profit” since they do not charge a fee for their counseling service, however, most Credit Counseling companies require significant fees for their “Debt Management Programs.” (NOTE: Debt Management is more commonly known as “Debt Consolidation”, not to be confused with a Debt Consolidation Loan)
As a client of a Debt Management/Consolidation Program, you send a payment to cover all of your debts, to a Credit Counseling Company each month. They distribute your money out to all of your creditors.
Salespeople of Credit Counseling Companies lure clients into these programs with the promise of lower interest rates. They claim to “go to bat for you” by calling your creditors and negotiating down the rates.
Nothing could be farther from the truth! They don’t negotiate anything! They work as glorified collectors for the credit card issuing banks, and they have agreed to interest rates that are consistent for all of their clients.
The interest rates are somewhere between 7% and 11%, depending on the credit card bank. I agree that 7 to 11% are lower interest rates for most people seeking relief from debt. But the credit card companies agree to the lower interest rates only if you are willing to completely pay off your debt within 60 months or five years.
Fewer payments mean higher payments! What benefit are lower interest rates if your payments are still unaffordable?
Another downfall of Debt Management/Consolidation Programs . . . if you miss just one payment, the credit card companies will be compelled to raise your interest rates to between 28% and 32%. This is known as Universal Default.
What is the probability that most people would miss at least one payment when trying to make 60 consecutive monthly payments? They forget to put a stamp on the envelope. They kids get sick. The transmission on the car goes bad. Life gets in the way.
Based on our experience, we estimate that less than 10 percent of people who enroll in Debt Management/Consolidation Programs, actually complete them, primarily due to Universal Default.
But the most outrageous claim that salespeople of Credit Counseling Companies make is that Debt Management/Consolidation Programs preserve your good credit. Read further and decide for yourself.
When you enter into a Debt Management/Consolidation Program, most of your creditors will notify the Credit Bureaus, who in turn will place the letters “D-M-P” on your credit reports. Salespeople of Credit Counseling Programs will argue that the “D-M-P” on your credit report will not reduce your credit score.
They are correct, but what they are not telling you is that the “D-M-P” on your credit report is there to let lenders know you are not a good credit risk. It tells them you are struggling financially and having difficulty making your payments. It is there to prevent you from getting additional credit.
After entering into a Debt Management/Consolidation Program, all but one or two of your credit card accounts will be closed. How do you think simultaneously closing down all of your accounts will affect your credit score? Closing down an account is the worst thing you can do to your credit scores.
It is also important to note that almost all Credit Counseling companies distribute your payment out to your creditors only once per month. The problem is that if you have seven credit cards, all of them have different due dates. In order for you to stay current on your payments, the Credit Counseling companies would have to either contact each of your creditors for permission to adjust the due dates, or distribute your payments to each creditor on a different date.
Since they are only distributing your payment out once per month, in our example, six of your payments are going to be late every month (that’s 60) you are on the program.
People who have been on Debt Management/Consolidation Program’s call us on a regular basis for assistance with their credit scores. Many of them have hundreds of late pays on their credit reports.
Based on what you have just heard, do you believe that Debt Management/Consolidation Program’s preserve your good credit?
You may also be interested to know that many Credit Counseling companies have scammed their clients by not forwarding payments to creditors. They avoid paying their clients back by either filing bankruptcy or leaving the country. Recently, Ameri Debt stole millions of dollars of their client’s money that was supposed to be passed on to creditors.
In conclusion, it is our opinion that Debt Management/Consolidation is not a viable option for anyone in any situation since it penalizes you for paying your debt in full by destroying your credit. Please consider Debt Paydown as a viable alternative to Debt Management/Consolidation. Debt Paydown reduces the payoff of debt from one third to one half. It also eliminates most of the interest associated with debt while simultaneously increasing credit scores.
For additional information, please feel free to call us toll free at (888) 449-4924. Someone on our staff will be available to either take your call or return your call. You may also click on the “Contacts” link and complete the form for a return call.
