What is Credit Counseling?
What is credit counseling? This is a non-profit organization created to
help those who were having difficulty making their payments. The
organization could help negotiate a reduction in the clients' interest
rates, consolidate their payments into one lower payment, and show them
how to manage their finances through proper budgeting and such.
In order for the organizations to sustain themselves, the credit card
companies provide financial support in the form of "fair share"
contributions. This means that the creditors give the organization a
contribution of 8% - 15% of what the client paid during their
Essentially, with credit counseling, creditors get their money, the
client avoids bankruptcy and gets out of debt within 5-7 years, and the
organization provides a valuable service to the community. Great in
theory, right? WRONG!
Many of these organizations don't focus their attention on the
financial planning and instead on the repayment or "debt management"
portion of the program. This is to increase the amount of fair share
contributions they receive.
It can be said that credit counseling is a disguised form of
collections because the organizations are really paid by the creditors
based on how much they can get a client to pay.
Certainly a conflict of interest, if you ask me.
It's important to note that your debts are also being paid by a 3rd
party. Any time your creditors receive payment through this type of
plan, it may be noted on your credit report as "paid through
counseling." Many lenders view this as the same as filing a Chapter 13
In conclusion, I'll let you decide if this is your Best Debt
Elimination Plan. You can negotiate lower interest rates for yourself.
And you can set up your own fixed payment. Is it for real, or a wolf in
sheep's clothing - you decide.