Leslie
04-17-2003, 12:26 PM
I post this because a lot of people (esp. people of color) use these to help them get out of credit trouble - but they don't always have your best interest at heart:
Saviors or costly middlemen?
Credit counselors don't always serve consumers
By Ray Martin, CBS.MarketWatch.com
Last Update: 12:02 AM ET April 17, 2003
BOSTON (CBS.MW) -- Credit counseling is a growth industry as a growing number of Americans become swamped with mounting credit card and other installment debt.
Last year, an estimated 9 million people in financial trouble have some contact with a consumer credit-counseling agency, according to an April 2003 report issued by the Consumer Federation of America.
According to the Federal Reserve, revolving debt, most of which is credit card debt, was $723.7 billion in 2002.
If pending federal bankruptcy legislation becomes law -- before filing for personal bankruptcy debtors would be required to receive a credit-counseling briefing and complete a credit-counseling course before their debts are discharged -- the industry will grow even larger. In 2002, more than 1.5 million people declared personal bankruptcy.
Who is watching?
Apparently anyone can start up a credit-counseling agency. There are no federal regulations that govern these shops, and only 24 states have laws for licensing, bonding or registration of debt counseling firms. Over half of those states exempt non-profit corporations from these regulations -- and most credit counseling agencies are set up as non-profit.
Not debt saviors
It is particularly curious that most debt counseling companies are set up as non-profit corporations. Debt counseling phone reps will tell you that their company is not-for-profit because they are the good guys and they only want to help debt burdened consumers.
The Consumer Federation report warns that consumers should not be fooled by credit counseling agencies' benevolent-sounding tax status. Some debt-counseling shops are making money off the backs of people who are trying to pay off their debts.
In addition to the marketing boost that comes from trumpeting their not-for-profit status, in some states this tax status allows the agencies to avoid the expense of posting a bond in a state that would otherwise require them to ensure customer debt payments they receive are safe and secured.
Counseling and a DMP
Basically there are two parts to the services offered by credit- counseling companies. The first is a combination of budget/financial management counseling services and a written action plan to get out of debt.
The second is a Debt Management Plan, or DMP, where the agency actively intervenes with an individual's creditors to attempt to negotiate a payment plan that can include reduced minimum payments, reduced interest rates and lower fees
The DMP involves a payment proposal you agree to stick to and that is submitted to your creditors by the debt counselor. You agree to make a single monthly payment to the debt manager and they in turn disburse the money to each of your creditors.
Making money on the payments of debtors
Most of the credit counseling companies will ask prospective customers to sign up for a debt management program and sign an agreement to pay a "voluntary contribution." These fees consist of a one-time set-up fee of around $20 and an ongoing fee of $12 a month.
Other companies charge as much as 100 percent of your first monthly payment and $7 a month for each account included in the debt management program. If your monthly payment is $350 and you have eight credit card accounts, this can add up to over $1000 in the first year.
Then there's the understanding between credit counseling shops and the creditors, which are mainly the credit card companies. Many credit card companies agree to pay a fee to the credit counseling company equal to a percentage of the payments sent to them under the administration of a Debt Management Program.
In the industry this is called a Fair Share contribution and it ranges from nothing to upwards of 8 percent. These fees, not the "voluntary contributions," are the majority of the revenue collected by credit counseling companies.
Credit card companies write off these fees as a debt collection expense. What this amounts to is that credit-counseling companies are paid by creditors to be their debt collectors.
Three ways to save money
Credit counseling companies claim that creditors are more willing to negotiate with them on your behalf because they know you are at the end of your rope and are likely to take a more desperate measure - bankruptcy. As a result, once they have accepted your debt management proposal and have received three months of payments on time, creditors are willing to lower interest rates, waive past late fees and even "re-age" your past due accounts to reflect a current, "paid-as-agreed" status.
'Managed By Credit Counseling Company'
Some mortgage lenders report that getting involved in debt management programs can harm prospective homebuyers' credit reports. This happens when individuals sign up, make their monthly payment to the credit counselor, who then sends the payment a month later, or worse, keeps it as the initial "voluntary contribution." This causes the creditors to report a "late payment status" on each account involved -- something mortgage lenders tend to frown on.
Also, consumers need to know that the words "Managed by Credit Counseling Company" may appear under each account on their credit report enrolled in a debt management program. Some creditors choose to note that on credit reports, others don't. When you apply for credit in the future, that notation could label you a "credit loser."
Avoiding the middleman
If you are current on your payments, but sense trouble on the horizon, consider negotiating directly with your creditors for lower interest rates, lower payments or lower fees.
If your creditors won't budge, get approved for low rate cards and transfer your balances. If you have no payments 60 days or more past due over the last 24 months, shop around and check out low interest rate cards on Bankrate.com. You'll save the fees charged by credit counseling firms and avoid the problems that can occur when debt management plans are mismanaged.
Who needs this counseling
Clearly, if you are in debt and see no light at the end, these services may be worth a try. Also, if negotiating with credit card companies and managing your finances is not your strong suit, these programs can help you dig out of a debt hole.
Creditors may be more willing to cut a deal to reduce fees and interest rates because you are serious, even if incapable, about getting your debt paid off. As a quid-pro-quo for your using the services of a credit-counseling company and agreeing to a debt management plan, they will offer lower interest rates and fees.
Red flags
If you go this route, know that not all credit counseling firms are the same. If you see these "red flags" go elsewhere:
Consumer complaints. Ask for references, check for consumer complaints filed with your state attorneys general and the Better Business Bureau. Member agencies of the National Foundation of Credit Counselors who abide by its rules of practice and are authorized to use the Consumer Credit Counseling Service marks are a good place to start your search. Just remember, these are independently run shops and the quality can vary from one to another.
High fees. Fees charged by credit counseling agencies can vary widely. If the set-up fee for a debt-consolidation plan is more than $50 and the monthly fees are more than $25 look for a lower cost provider. Also, avoid credit counselors that charge 100 percent of the first month's payment as a start-up fee.
Hard sell. If the person you speak to is aggressively pushing a debt consolidation plan, slow him down by asking him to send you a copy of the Debt Management Agreement. Avoid signing an agreement that promises nothing and requires you to waive your rights to sue for damages. Read these carefully before you sign up.
Plan in a few minutes. Any credit counseling agency that claims they can create a personalized debt management plan for you in a few minutes is more interested in selling its product than providing effective and objective counseling. If they rush through their process, be in a rush to tell them 'no, thank you.'
Don't file bankruptcy! Credit counseling agencies are loath to discuss bankruptcy alternatives with prospective customers because they don't make any money when debtors file personal bankruptcy. But for many people, bankruptcy can protect important property rights and preserve retirement accounts. Individuals should seek advice from a knowledgeable and unbiased professional about this before signing up for credit counseling.
Credit repair scams. Consumer complaints and fraudulent claims by credit repair firms are frequent, according to the Better Business Bureau. They warn the public to beware of so-called credit repair services and debt doctors, who advise consumers that they can erase negative credit report information or obtain new credit by using a newly obtained federal tax ID number versus their social security number. This is illegal.
Certified Financial Planner Ray Martin writes on personal finance for CBS.MarketWatch.com and also appears on the "The Early Show" on CBS. He is co-author of "The Rookie's Guide to Money Management."
Saviors or costly middlemen?
Credit counselors don't always serve consumers
By Ray Martin, CBS.MarketWatch.com
Last Update: 12:02 AM ET April 17, 2003
BOSTON (CBS.MW) -- Credit counseling is a growth industry as a growing number of Americans become swamped with mounting credit card and other installment debt.
Last year, an estimated 9 million people in financial trouble have some contact with a consumer credit-counseling agency, according to an April 2003 report issued by the Consumer Federation of America.
According to the Federal Reserve, revolving debt, most of which is credit card debt, was $723.7 billion in 2002.
If pending federal bankruptcy legislation becomes law -- before filing for personal bankruptcy debtors would be required to receive a credit-counseling briefing and complete a credit-counseling course before their debts are discharged -- the industry will grow even larger. In 2002, more than 1.5 million people declared personal bankruptcy.
Who is watching?
Apparently anyone can start up a credit-counseling agency. There are no federal regulations that govern these shops, and only 24 states have laws for licensing, bonding or registration of debt counseling firms. Over half of those states exempt non-profit corporations from these regulations -- and most credit counseling agencies are set up as non-profit.
Not debt saviors
It is particularly curious that most debt counseling companies are set up as non-profit corporations. Debt counseling phone reps will tell you that their company is not-for-profit because they are the good guys and they only want to help debt burdened consumers.
The Consumer Federation report warns that consumers should not be fooled by credit counseling agencies' benevolent-sounding tax status. Some debt-counseling shops are making money off the backs of people who are trying to pay off their debts.
In addition to the marketing boost that comes from trumpeting their not-for-profit status, in some states this tax status allows the agencies to avoid the expense of posting a bond in a state that would otherwise require them to ensure customer debt payments they receive are safe and secured.
Counseling and a DMP
Basically there are two parts to the services offered by credit- counseling companies. The first is a combination of budget/financial management counseling services and a written action plan to get out of debt.
The second is a Debt Management Plan, or DMP, where the agency actively intervenes with an individual's creditors to attempt to negotiate a payment plan that can include reduced minimum payments, reduced interest rates and lower fees
The DMP involves a payment proposal you agree to stick to and that is submitted to your creditors by the debt counselor. You agree to make a single monthly payment to the debt manager and they in turn disburse the money to each of your creditors.
Making money on the payments of debtors
Most of the credit counseling companies will ask prospective customers to sign up for a debt management program and sign an agreement to pay a "voluntary contribution." These fees consist of a one-time set-up fee of around $20 and an ongoing fee of $12 a month.
Other companies charge as much as 100 percent of your first monthly payment and $7 a month for each account included in the debt management program. If your monthly payment is $350 and you have eight credit card accounts, this can add up to over $1000 in the first year.
Then there's the understanding between credit counseling shops and the creditors, which are mainly the credit card companies. Many credit card companies agree to pay a fee to the credit counseling company equal to a percentage of the payments sent to them under the administration of a Debt Management Program.
In the industry this is called a Fair Share contribution and it ranges from nothing to upwards of 8 percent. These fees, not the "voluntary contributions," are the majority of the revenue collected by credit counseling companies.
Credit card companies write off these fees as a debt collection expense. What this amounts to is that credit-counseling companies are paid by creditors to be their debt collectors.
Three ways to save money
Credit counseling companies claim that creditors are more willing to negotiate with them on your behalf because they know you are at the end of your rope and are likely to take a more desperate measure - bankruptcy. As a result, once they have accepted your debt management proposal and have received three months of payments on time, creditors are willing to lower interest rates, waive past late fees and even "re-age" your past due accounts to reflect a current, "paid-as-agreed" status.
'Managed By Credit Counseling Company'
Some mortgage lenders report that getting involved in debt management programs can harm prospective homebuyers' credit reports. This happens when individuals sign up, make their monthly payment to the credit counselor, who then sends the payment a month later, or worse, keeps it as the initial "voluntary contribution." This causes the creditors to report a "late payment status" on each account involved -- something mortgage lenders tend to frown on.
Also, consumers need to know that the words "Managed by Credit Counseling Company" may appear under each account on their credit report enrolled in a debt management program. Some creditors choose to note that on credit reports, others don't. When you apply for credit in the future, that notation could label you a "credit loser."
Avoiding the middleman
If you are current on your payments, but sense trouble on the horizon, consider negotiating directly with your creditors for lower interest rates, lower payments or lower fees.
If your creditors won't budge, get approved for low rate cards and transfer your balances. If you have no payments 60 days or more past due over the last 24 months, shop around and check out low interest rate cards on Bankrate.com. You'll save the fees charged by credit counseling firms and avoid the problems that can occur when debt management plans are mismanaged.
Who needs this counseling
Clearly, if you are in debt and see no light at the end, these services may be worth a try. Also, if negotiating with credit card companies and managing your finances is not your strong suit, these programs can help you dig out of a debt hole.
Creditors may be more willing to cut a deal to reduce fees and interest rates because you are serious, even if incapable, about getting your debt paid off. As a quid-pro-quo for your using the services of a credit-counseling company and agreeing to a debt management plan, they will offer lower interest rates and fees.
Red flags
If you go this route, know that not all credit counseling firms are the same. If you see these "red flags" go elsewhere:
Consumer complaints. Ask for references, check for consumer complaints filed with your state attorneys general and the Better Business Bureau. Member agencies of the National Foundation of Credit Counselors who abide by its rules of practice and are authorized to use the Consumer Credit Counseling Service marks are a good place to start your search. Just remember, these are independently run shops and the quality can vary from one to another.
High fees. Fees charged by credit counseling agencies can vary widely. If the set-up fee for a debt-consolidation plan is more than $50 and the monthly fees are more than $25 look for a lower cost provider. Also, avoid credit counselors that charge 100 percent of the first month's payment as a start-up fee.
Hard sell. If the person you speak to is aggressively pushing a debt consolidation plan, slow him down by asking him to send you a copy of the Debt Management Agreement. Avoid signing an agreement that promises nothing and requires you to waive your rights to sue for damages. Read these carefully before you sign up.
Plan in a few minutes. Any credit counseling agency that claims they can create a personalized debt management plan for you in a few minutes is more interested in selling its product than providing effective and objective counseling. If they rush through their process, be in a rush to tell them 'no, thank you.'
Don't file bankruptcy! Credit counseling agencies are loath to discuss bankruptcy alternatives with prospective customers because they don't make any money when debtors file personal bankruptcy. But for many people, bankruptcy can protect important property rights and preserve retirement accounts. Individuals should seek advice from a knowledgeable and unbiased professional about this before signing up for credit counseling.
Credit repair scams. Consumer complaints and fraudulent claims by credit repair firms are frequent, according to the Better Business Bureau. They warn the public to beware of so-called credit repair services and debt doctors, who advise consumers that they can erase negative credit report information or obtain new credit by using a newly obtained federal tax ID number versus their social security number. This is illegal.
Certified Financial Planner Ray Martin writes on personal finance for CBS.MarketWatch.com and also appears on the "The Early Show" on CBS. He is co-author of "The Rookie's Guide to Money Management."