Credit Counseling

Credit Counseling was a program invented by the credit card companies.

Credit Counseling was a program invented by the credit card companies. In it, a borrower repays all the money owed plus some interest.

Credit Counseling is the first suggestion of credit card companies if your account is in trouble, simply because it is the most profitable for them. While at face value credit counseling can look like a good program, it carries some detriments you should be aware of.

  • Credit Counseling will show on your credit as “managed account”, as a signal to other creditors.
  • You will repay all the money you owe.
  • You will still pay interest.
  • You will commit to a program typically 5 to 7 years long
  • You might pay a counseling fee of something like $49 a month, which over several years is several thousand dollars.

What are Credit Counseling Companies?

Many credit counseling companies offer services through a local office, on the Internet, or on the telephone. Under this program, a creditor may be willing to reduce your interest rates and waive over-limit or late fees, though all creditors may not reduce on this program. You make one payment each month to your counseling company, who will distribute the funds accordingly to the creditors. In return, you must agree to stop using your credit cards and not apply for any new credit.

Most counseling companies represent themselves as not-for-profit, but get a “fair share” agreement from the creditor up to 15% on top of monthly fees. As a result, the IRS has revoked the non-profit status of many of these companies.

Be wary of credit counseling organizations that:

  • Require up front or monthly fees for their program
  • Pressure you for voluntary donations towards their program. These are simply disguised fees.
  • Do not disclose the serious negative consequences of their program on your credit.
  • Refuse to send you information about their services without first requiring you to give your personal financial information or account numbers.
  • Try to enroll you in a plan the first time you speak with them without first reviewing your personal situation.
  • Offer to enroll you in a credit counseling program without providing the required budgeting and money management education.
  • Demand that you make a payment towards their program before your creditors have agreed to reduce your interest rates and payments.