Consumer Credit Counseling
Consumer Credit Counseling services use various names: Consumer Credit Counseling, Credit Counseling, non-profit Credit Counseling, nonprofit Consumer Credit Counseling services, debt management services, non-profit debt management service, non-profit Consumer Credit management, nonprofit debt consolidation and debt consolidation.
Some Credit Counseling services use names such as “XYZ” Consolidation Company to disassociate themselves from the negative reputations that many nonprofit Consumer Credit Counseling services have earned. The names are misleading because Consumer Credit Counseling companies do not offer consolidation loans. “Consolidation”, in this case, refers to combining your many bills into one monthly payment. You send the payment to the Consumer Credit Counseling service, which disburses the payments to your creditors.
The Untold Truth About Consumer Credit Counseling
Non-profit Consumer Credit Counseling services were initiated by Visa to recover money they were losing as consumers fell behind on payments. With little consumers could do to get fiscal relief, credit card companies helped found Consumer Credit Counseling organizations. Acting as separate organizations from creditors (often as a non-profit), Consumer Credit Counseling services claimed they were established to help the consumer. Operating as non-profit, they have attracted thousands of clients to Consumer Credit Counseling services, charged interest and fees, and helped creditors recover all their money.
Nonprofit Consumer Credit Counseling services work like this: You make one payment to the nonprofit Credit Counseling service (along with a fee) and they disburse the money to your creditors. Non-profit Consumer Credit Counseling services do not reduce your actual debt. They actually have pre-negotiated interest rates with creditors. Your current interest rate will adjust to the rate they have negotiated, meaning it may stay the same, be reduced, or even increase. Many using Non-profit Consumer Credit Counseling services pay higher monthly payments than their original minimums. Consumers are sold on the fact that they will make one payment and the Consumer Credit Counseling service will distribute their money. Unfortunately, they depend on the Credit Counseling service to make their payments on time and correctly. Many nonprofit Credit Counseling services fail here. Some deposit your money into an interest bearing trust account for a week or so before a payment is made. Non-profit Consumer Credit Counseling services may hold money in this account for as long as possible to earn interest. If the nonprofit Consumer Credit Counseling service makes a late payment, they are not affected. But you receive the late marks and charges.
Nonprofit Credit Counseling services are paid a commission, called “fair share”, that is based on the debt recovered from you. Until recently these Consumer Credit Counseling services were paid a fare share of 12% to 15% by creditors. In the late nineties, creditors reduced the average fare share paid to the non-profit Consumer Credit Counseling services to approximately 8% to 10%. As a result, many Credit Counseling companies became unstable. Some could not make consumers’ payments on time or, in rare cases, at all. Consumers saw late charges accumulate.
A majority of people cannot complete a Credit Counseling program and drop out or will be dropped for not being able to keep up with their payments. Approximately 65 – 70% of those who enter a nonprofit Consumer Credit Counseling program are unsuccessful. These are not good odds. A primary reason for failure with nonprofit Consumer Credit Counseling services is that your monthly payments are often higher than your original monthly minimums. Furthermore, you will have to sustain this payment for approximately 5-6 years. In many cases, it takes up to three times longer than the original estimate to complete. Common complaints with Consumer Credit Counseling services are: high monthly payments, a lack of progress in reducing balances, and late payments resulting in additional fees.
Despite marketing efforts and remarks to the contrary, Consumer Credit Counseling services do negatively affect your credit report. When accepted into a non-profit Consumer Credit Counseling program your creditors will close your accounts and report this to the credit bureaus. Additionally, creditors will report to the credit bureaus that you have entered a “hardship” program. You will receive a mark on your credit. While this will not necessarily affect your actual FICO score, it may damage your creditworthiness to a lender.
- Credit Counseling companies are often funded by the same creditors that you owe.
- Credit Counseling is like another form of “collections” in that they charge interest and fees and simply disperse payments to your creditors.
- Credit counseling consolidates your bills into one convenient monthly payment.
- It usually takes 5 to 7 years to pay down debt in a Credit Counseling program.
- During the first three years, you will pay nearly 25% of your original balance in interest alone.
- Credit Counseling companies have pre-negotiated interest rates with your creditors that may be higher, lower, or the same as your current rates.
- Credit Counseling forces you to repay the full balance plus interest to your creditors.
- Credit Counseling companies often charge a setup free and monthly fee, often called a “donation”. Monthly fees can range from $20 to $50.
- Credit Counseling companies pay your creditors so you can remain current with your creditors while in the program.
- Credit Counseling will not have a negative effect on your FICO score; however, it will usually lead to “Credit Counseling”, “CC”, or “Credit Management” marks on your credit report. These marks are not viewed in a positive light by lenders.
- Some mortgage lenders consider Credit Counseling as being on par with bankruptcy.
Remember, nonprofit Consumer Credit Counseling has no effect on principal balance. In Consumer Credit Counseling you pay the debt in full ideally with reduced interest. In Credit Counseling, payments are often still high, and it will still take 5-6 years to pay off the debt. Creditors themselves primarily fund nonprofit Credit Counseling services. In other words, they may not represent your best interests. And lastly, even when you have paid off the debt in full, your credit reports may still be in shambles. For many, Debt Settlement is more viable alternative. Nationwide Debt Reduction Services is the first step to your debt freedom. Find the Right Debt Relief Solution, Start with a FREE Debt Analysis Call Toll Free (888) 987-1325
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Find the Right Debt Relief Solution, Start with a FREE Debt Analysis Call Toll Free (888) 987-1325