Our examination of debt related services divulged that Consumer Credit Counseling (CCCS), also known as debt management, is the most popular debt elimination method. Consumer credit counselors and debt managers can most easily be distinguished by their non-profit status. Although we found that many consumers confuse "non-profit" with "no charge for services", or charity. Non-profit credit counselors and debt managers generate millions of dollars each month and employ thousands of people.
The way credit counseling and debt management services are supposed to work is the consumer meets with a Credit Counselor, who analyzes all the consumer's unsecured debts, other obligations, and their monthly income. From here the credit counselor or debt manager formulates a budget. Based on the budget, the Credit Counselor or debt manager present a plan that includes lowering of credit card interest rates and sometimes, the monthly payment. The CCCS contacts all the unsecured credit card issuers and requests that the consumer be permitted to enter the bank's hardship repayment plan at a lower interest rate.
Our research into this clarified that most banks do offer these "hardship" programs and agree to reduce the interest rate for a specific length of time (12-18 months typically). Some banks agreed to waive any accrued late fees or penalties, and a few banks offered lower minimum monthly payment amounts.
Once the consumer is enrolled with the consumer credit counselor or debt manager, the consumer is sent a monthly billing statement from the debt manager or credit counselor for the total amount agreed to all the creditors plus a handling charge for the credit counselor or debt manager. The handling charge is minor, and similar to debt negotiator or debt settlement company's monthly charge (average: $40).
The single payment is sent to the credit counselor or debt manager and they in turn make payments to all the creditors. Because the accruing interest is slowed, more money is routed to the principal. By routing more money to the principal each month the balances are reduced. As the balances are reduced, the interest charged for that month is also reduced. Provided the same monthly payment is made each month the consumer should theoretically be out of debt in 4-5 years.
The consumer credit counselor or debt manager charges a relatively small amount in fees. There are no settlement fees based on the amount the consumer saves as we found with debt negotiators or debt settlement companies. The consumer credit counselors and debt managers charge a set-up fee, typically equal to one monthly payment, a monthly service fee of approximately $40 and where credit counselors and debt managers make the rest of their money is from "donations" from the creditors based on the amount they "collect" from their customers (consumers enrolled in the credit counseling program). These donations are the primary purpose for these companies organizing under a "non-profit" status (for-profit companies cannot receive donations).
Though in theory this should work as a long term approach to limiting the high cost of accruing interest there are some pitfalls:
- Credit counselors don't always make timely payments resulting in late fees and a derogatory credit history;
- Not all credit card banks agree to reduce the interest;
- Almost all credit card banks require you to be at least 30 days late before entering hardship programs (late payment history);
- CCCS frequently advertises 50% lower monthly payment, but we found this to almost never happen. Even if it did happen, smaller monthly payments will not get a consumer out of debt;
- Program has a high failure rate;
- Many banks have a negative view of CCCS and refuse to offer credit to those enrolled.
Credit counseling seems like the viable alternative for the consumer overwhelmed by credit card debt, has no ability to consolidate the debt using a home equity financing and needs a long-term low monthly payment option.
