Consumer Credit Counseling Pros and Cons
- 6 min read
- A Consumer Credit Counseling Debt Management Plan can cut your interest rates.
- Collection calls stop when you are enrolled in a DMP
- About 75% of consumers who enroll in a DMP drop out of the program, not completing it.
The Pros and Cons of Consumer Credit Counseling
Consumer Credit Counseling is one of the debt relief alternatives available to you if you are struggling with debt and looking for help. Like other debt relief solutions, credit counseling is right for some people and situations, but it is not a one-size-fits-all solution.
A good way for you to weigh whether a Consumer Credit Counseling Service’s Debt Management Plan (CCCS DMP) is a smart choice for you is to examine the pros and cons of the program.
One benefit of a reputable Consumer Credit Counseling Service is that you will receive a free financial consultation. You and the counselor review the facts of your financial situation: how much you owe, which creditors you owe, the interest rates on your accounts, and the size of your required monthly minimum payments; your income, credit score and assets; and whether you are budgeting your money. This review can be beneficial, but is rarely enough to help you find enough money each month to pay down your debt effectively on your own.
A CCCS will recommend enrolling in a DMP, if they can present a proposal to pay off your debt more effectively. Credit Counselors don’t automatically try to enroll everyone with whom they speak into a DMP.
Speak with a Consumer Credit Counseling Service for a free consultation, by calling (844) 432-0140.
The Pros of a Credit Counseling Service DMP
Here are some positive effects of enrolling in a DMP. How beneficial each one is depends on different factors, such as your current interest rate, monthly payments, credit score, a proposal to review.
Lower Interest Rates
You benefit most from enrolling in a Consumer Credit Counseling Service’s Debt Management Plan if you have high interest debts with creditors that offer a lower interest rate for accounts enrolled in the DMP. Most creditors do participate in DMPs, but not all do. Assuming your accounts are eligible, you need to compare your current interest rate and what your rate will be in the DMP. If you have high interest rates that can be reduced dramatically, then the DMP will help you get out of debt faster and save money.
No Harassing Collection Calls
Many people who sign up for a CCCS DMP are behind on one or more of their accounts and receiving collection calls. Getting a call from a debt collector can be very stressful. Getting repeated calls from numerous collectors even more so. When any account that you enroll in a CCCS DMP is accepted by the creditor, you won’t receive more collection calls. If you aren’t behind on any accounts at the time you enroll in the DMP, you won’t have to worry about facing collection calls during the program. Of course, you need to make your program payments as agreed, or collection calls could ensue.
Lower Monthly Payment
Your monthly program payment is usually smaller than the required monthly minimum payments from your creditors. A more affordable payment makes it easier for you maintain your commitment.
Late Fees Waived
The CCCS may be able to get the creditor to waive late fees and penalties that you were charged. While there is no guarantee that creditors will do this, it is likelier that you will avoid these costs inside a CCCS DMP than if you try to get them waived on your own.
One Monthly Payment
When you are in a DMP, you send one monthly payment to the CCCS. Your program payment is split up and each creditor is paid by the CCCS. This is a big convenience, especially for someone who has trouble staying on top of payments to multiple creditors with due dates spread throughout the month.
Black and White
When you are presented a DMP, it is a concrete proposal. The size of the monthly payment, total costs, and number of months it will take to complete the DMP are not going to change. If you stick to the plan, you will get out of debt.
The Cons of Consumer Credit Counseling
Now that you know the positive side of using a DMP to resolve your debt, it is equally important that you're aware of the negative.
Many people, even those who work in the consumer finance industry, still erroneously believe that entering into a debt management plan will lower your FICO score. At one time, enrollment in a credit counseling program was considered derogatory mark in a consumer’s credit file. However, in 1998, Fair, Isaac & Co., stopped using enrollment in a credit counseling program as a factor in calculating credit scores , after a study it conducted found that consumers enrolled in debt management plans are no more likely to default on new debts than the average consumer.
While your credit score is not affected by enrolling in a credit counseling program, you may need to make a program payment in your DMP and a payment to your creditors as your DMP starts. If one reason you are using a DMP is because money is tight, you may not be able to pay the DMP and the creditors during the same month. That could result in late payments to your creditors that are reported to the credit bureaus and lower your score.
Additionally, a DMP will likely require you to close your cards. This will harm your credit utilization and lower your score.
For these reasons, even though the enrollment in a DMP doesn't lower your score, you may take a credit hit
Accounts are Frozen
A CCCS DMP is not a good solution if you need to continue using credit to take on additional debt, as you have to close the accounts you enroll. There are times when you may keep one card active, such as if your employer requires you to use a card for travel.
Negative Effect on Applying for Credit During Program
Your DMP is likely to last four years or longer. If you need to finance a car during the program, be prepared to pay a very high interest rate. It is possible that you won't qualify for a loan at all. The credit impact could also affect your ability to refinance a home loan, qualify for a home purchase loan, or even rent an apartment According to the National Foundation for Credit Counseling, “If your credit report reflects that you have paid creditors as agreed in the past, a DMP could have a negative impact on a creditworthiness decision by a potential creditor, landlord, or employer because it is an indicator that you are or have experienced financial difficulties.”
Low Completion Rate
Though it is hard to come up with firm numbers, it is estimated that about 25% of consumers that enroll in DMPs complete them successfully. Ask the credit counseling service about the completion rate of their clients and be honest with yourself whether the monthly payment they demand is one you can afford to make each month.
You Must Enroll All Eligible Debts
If you have some cards that would benefit from a CCCS DMP, but others on which you have a good interest rate you still have to enroll all the accounts. It may be case that a card on which you have a lower rate than the DMP can provide will increase.
Compare Debt Relief Solutions
Use the Bills.com Debt Navigator to compare all the main debt relief solutions. You will receive a recommendation based on what you state as your priorities. The Debt Navigator is free and has no impact on your credit.
Struggling with debt?
If you are struggling with debt, you are not alone. According to the NY Federal Reserve total household debt as of Quarter Q4 2022 was $16.91 trillion. Student loan debt was $1.60 trillion and credit card debt was $0.99 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
Collection and delinquency rates vary by state. For example, in Nevada, 13% have student loan debt. Of those holding student loan debt, 10% are in default. Auto/retail loan delinquency rate is 4%.
Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.