The Truth About Credit Counseling

Supporting a family on one income is difficult; even two-income families in the US find themselves carrying an average of $10,000 in credit card debt alone. If your family has found itself sinking, you're not alone. You may be tempted to join a Credit Counseling Service (CCS) for assistance, but before you do, let me tell you about some potential drawbacks of these services.

I'll start by mentioning the additional money you may be required to spend each month through a CCS program. Seemingly small monthly charges can really cost you over the term of your agreement with CCS, even though the agency itself may not charge them. For example, most services require payment in the form of money order or certified check. A survey of banks in the Washington, DC area found that fees for certified checks could be as high as $13.00. Adding a stamp makes it $160 per year--just to send your payment!

Another surprising fee is the initial deposit required by Credit Counseling agencies. The first month's payment, which is collected as soon as you start the program, is not actually disbursed until your second payment is received. Although this deposit is generally refunded at the completion of the program, it may cause hardship for families having difficulty making ends meet. One man I interviewed had a monthly CCS payment of $865. He forwarded his first check to the counseling agency, but was advised to also make the minimum payments on his credit cards, as his CCS payment would not be disbursed to his creditors until the second month of the program. "If I had the extra thousand dollars laying around, I wouldn't have needed the CCS program," he said.

Even non-profit credit counseling employees need to be paid, and this fee comes from the money you provide to each creditor. A recent Money magazine article states: "Creditors typically pay [CCS] a fee equal to 11% of the amount you fork over to pay off your bills." Although this is standard practice in the Credit Counseling Services industry, it is something you will need to discuss with your counselor. Many agencies also request management fees and/or donations, which are automatically deducted from your monthly payments.

Yet another fee many consumers going through CCS programs may face is the long-distance charges for calling the Customer Service line. One woman in Pennsylvania, who signed up with a Credit Counseling Service through their toll-free number, was later informed that all telephone customer service for existing customers was handled through the main customer service line--which was not toll-free. When her accounts were paid late, she called the main number and waited on hold for nearly 25 minutes while a representative tried to determine what had happened to her payment.

In addition to the hidden fees associated with a credit counseling program, you should also consider the effect this partnership will have on your credit report. For example, a collections agent for a major credit card informed me, "I have had people tell me that they are going through a Credit Counseling Service, but we didn't get a proposal from the service until 6 or 8 weeks later." This means your account may become 60 days past due, even though you've made timely payments to your CCS program. Furthermore, the creditors you include in the program generally note on your credit report that the debt has been assigned to a third party for assistance.

To avoid the accrual of late charges and additional negative marks on your credit report, you will need to call all of the creditors you assigned to the CCS program and change your due dates to coincide with the CCS disbursement. This is not done automatically. You will need to keep a close eye on the credit card statements to make sure there are no late charges assessed while you are on the program. Your CCS agency will generally have these charges reversed after they are identified.

While the marketing agents for the Credit Counseling agencies try to convince you that joining will show future lenders that you are responsible with your money, it may actually have the opposite effect. Nancy Yagich, the Lending Risk Manager for National City Mortgage, told me, "The majority of lenders initially look at joining a Credit Counseling Service similarly to filing Chapter 13 bankruptcy." A loan officer from another leading mortgage company told me that joining a credit counseling service demonstrates a customer's inability to handle his or her own finances. (However, you may still qualify for some loans through high-risk programs, which requires you to pay higher interest rates and make a larger down payment.)

Credit Counseling Services have helped many people escape the grip of debt, but there are other, better alternatives. Your main focus should not be simply paying off your debt, but changing your way of life. Debtor's Anonymous is a really good place to begin this process. It follows the twelve-step method of other addiction recovery programs, with the focus of not accruing additional debt. Even if you do not join a chapter, you can live the philosophy by joining their online support group at Yahoo! Groups, or reading Karen Casanova's book, Letting Go of Debt, which has daily meditations to help you avoid debt, one day at a time.

Financial counseling is another alternative. These organizations help consumers learn budgeting skills and will teach you how to pay off your debts by yourself. A listing of counselors in your area can be obtained from the Department of Housing and Urban Development website. You may also find a financial counselor in your area by checking your local yellow pages.

There are many books available to help you manage your debt yourself. Titles suggested by people who have "been there" include:

• Get Out of Debt
• How to Get Out of Debt, Stay Out of Debt & Live Prosperously, by Jerrold Mundis
• Rapid Debt Reduction Strategies, by John Avanzini
• Rich Dad, Poor Dad, by Robert T. Kiyosaki

Look for these books, as well as other debt reduction books, at your local library. They will give you the tools you need to be your own credit counseling agency--without any of the potential drawbacks of including a third party.