After joining a DMP, the creditors will close the customer’s accounts and restrict the accounts to future charges. The most common benefit of a DMP as advertised by most agencies is the consolidation of multiple monthly payments into one monthly payment, which is usually less than the sum of the individual payments previously paid by the customer. This is because credit cards banks will usually accept a lower monthly payment from a customer in a DMP than if the customer were paying the account on their own. Some DMPs advertise that payments can be cut by 50%, although a reduction of 10-20% is more common.
The second feature of a DMP is a reduction in the interest rates charged by creditors. A customer with a defaulted credit card account will often be paying an interest rate approaching 30%. Upon joining a DMP, credit card banks sometimes lower the annual percentage rates charged to 5-10%, and a few eliminate interest altogether. This reduction in interest allows the counseling agencies to advertise that their customers will be debt free in periods of 3–6 years, rather than the 20+ years that it would take to pay off a large amount of debt at high interest rates.
A third benefit offered by credit counseling agencies is the process of bringing delinquent accounts current. This is often called “re-aging” or “curing” an account. This usually occurs after making a series of on-time payments through the debt management program as a show of good faith and commitment to completion of the program. For example, a client with an account with a monthly payment of $50 which has not been paid in two months might be considered by the creditor to be 60 days past due. After joining the DMP and making three consecutive monthly payments, the creditor could re-age the account to reflect a current status. Thereafter the monthly payment due on the statements would be the monthly payment negotiated by the DMP, and the account report as current to the credit bureaus. This process does not eliminate the prior delinquencies from the credit bureau reports. It merely gives a fresh start and an opportunity for the client to begin building a positive credit history. Like all derogatory credit information, the passage of time will lessen the impact of the negative marks when credit scores are calculated.
So is it a scam?
Before we continue with this book I think it’s essential to make this point clear. There is no definite answer; you might as well ask me if all politicians are liars. While I’m sure the comical and somewhat popular belief is “yes, definitely” there are always exceptions. As with any company that provides a service, there are true-blue companies who want to help and scam artists who just want your money.
Credit counseling and debt management themselves are not inherently scams or tricks. They’re effective preventative measures for managing debt and avoiding costly bankruptcy that can seriously affect your credit. The stigma that they are scams stems from the fact that there are quite a few of these companies who are not reputable and do not help very much and from the fact that these services have a fairly low success rate due to either lack of participation from debtors or debts that are unmanageable.
The problem is that the unsavory companies give all the other companies a bad name. Bad publicity always spreads faster and harder than good publicity; after all, are you more likely to tell people about a really good experience or a really bad experience? Generally when we have a major issue with a company, service or product that we invest money into we are more likely to outcry about a bad experience (perhaps in a subconscious ploy to help others avoid the same issue) than to praise a good experience (If everything went fine you feel the transaction is complete).
Another reason people are generally untrusting of these companies is because the results are not always 100% stable. In general, loan consolidation is the most effective method of handling debt; it also carries the greatest risk (a new, secured debt). Second in the list is debt settlement because it imparts actual third-party action with your creditors and debt settlement companies are usually going to get a better response than you are; the only risk here is the price, which is usually not negligible. Last on the list is credit counseling. Credit counseling carries the least amount of risk because it’s generally affordable but it also has the least powerful effect because it’s usually little more than a financially-themed therapy session. For many people it’s an essential step and it can provide you with the information you need to turn your debt situation around but there’s nothing a credit counseling agency can do or tell you that you can’t do or find out for yourself. Take a look at this statistical information:
The National Foundation for Credit Counseling or NFCC released this information about over 3 million people who sought credit counseling through companies affiliated with them:
- About one-third (33%) were able to handle their finances on their own after counseling session.
- Another third were either too far gone for debt management plans to help, with too little income or too much debt, or had problems credit counseling couldn’t help and were referred to social services agencies because of issues such as a gambling problem, alcoholism or other addiction.
- The final third enrolled in debt-management programs (DMPs), but the dropout rate averages at least 45%.
And that only includes reputable companies who are affiliated with the NFCC. So, as you can see, there is definitely an opportunity to be helped but there are also circumstances that prevent people from being helped. If the company’s fees are reasonable, credit counseling and debt management is a relatively low-risk tactic that is worth considering before trying bankruptcy. Before you ultimately decide on a credit counseling agency or not there are some self-help techniques you can use to fix your credit card debt (and any debt really) that we will discuss in the last section of the book. The book is organized to give you the pertinent information about credit counseling and debt settlement companies but the order of operations you should use is this: Try to manage your debt yourself with the techniques at the end of the book, contact a credit counselor to see if it’s right for you, contact a debt settlement company of you need more assistance and consider loan consolidation or bankruptcy as last resorts if necessary.
Now that you have the basic scoop on what a credit counseling and debt settlement company can do, let’s discuss when it’s time and when it’s not time to contact one.