Consumer Credit Counseling Service

Credit Counseling Tips

Credit counseling is a service advertised for people who have serious and ongoing credit problems. Typically, the credit counselor helps you work out a debt management plan that will work within your budget. This service will also occasionally involve negotiating with your creditors in order to readjust payment schedules and perhaps proposed a reduction in the debt. There is a small fee for the service, but it seems that most of the money flowing to credit counseling agencies comes from the creditors themselves.

When this industry first came to life, by far the largest organization in the field was the National Foundation for Credit Counseling, or NFCC. It was established by credit organizations, and organized as a non-profit corporation. Cash flow to the branch offices however, came in the form of 15% of whatever was recovered from the debtor and paid to the creditor – usually one of the creditors that founded this supposedly benevolent agency.

As a result of this arrangement, there has been a great deal of criticism directed at the industry, revocation of non-profit status from a number of organizations and general questioning of the ethics involved. Still, the large national credit organizations continue to play a role in the NFCC. The kickbacks have apparently slipped to between 4% and 10% today. The Federal Trade Commission, the IRS and Congress have all taken a serious look at the industry, which has resulted in elimination of some of the unethical behavior. However there are still agencies that charge substantial fees and provide shoddy service.

The concept itself has merit. Most of us who have dug ourselves credit holes have no idea how to manage spending, let alone debt. Guidance along these lines should be helpful; a plan and a budget to stick to will contribute greatly to getting out of a credit mess. The one criticism of the methodology used by credit counselors is that a person who participates in a debt management plan will have later difficulty securing credit such as car loans or new credit cards. The reason for this is simply that the debt management plan assembled for them by the credit counselor included a reduced payment schedule, renegotiated debt, or both.

One of the more entertaining sidelights of this issue is that the collection agency industry objects strenuously to the cozy relationship between major credit providers and the credit counseling organizations. The collection professionals feel that the kickback arrangement between the creditors and the credit counselors provides an unfair advantage to the counseling professionals. It is difficult to generate sympathy for a shark who complains the water is too shallow.

Consideration is being given, however, to the argument that the kick back arrangement really means that most credit counselors are working on behalf of the credit industry rather than the consumer. Eventually, counselors and creditors will probably have to part ways. What that will mean for the consumer is a substantially higher fee structure in the credit counseling field; whether the willingness to reduce debt remains among the creditors is in question.

Regardless of the outcome, the use of a credit counselor by those of us who are clueless about controlling spending and retiring debt is probably worthwhile. Their methods will do some damage to your credit rating, but that’s already an ongoing process if you are steadily missing payments. And of course your credit rating will crumble completely if you are forced into bankruptcy by collectors threatening lawsuits.

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