In my first article in this series I outlined many benefits you get from working with a credit counseling agency. But there are also drawbacks to enrolling in this form of debt consolidation. And the concerns are not minor, which is why the word WARNING is capitalized.
As with any of the options I focus on in the CRN online debt relief system, considering any debt solution should be weighed by the benefits and drawbacks, set beside what you’re able to afford to commit to.
Many people fail and drop out of credit counseling debt management plans, and direct from the creditor hardship repayment plans. Additional financial pressures that can come along after you start a DMP are certainly a leading cause of having to cancel out of a plan. But over the years that I have been working with people who drop out of credit counseling, I have formed the opinion that about half of them should have never even signed up. Understanding why you may want to avoid a DMP, and a comprehensive understanding of the alternatives available to resolve credit card debt, can help you avoid becoming a debt consolidation plan statistic.
Nonprofit credit agencies are heavily promoted for help managing credit card debt.
Credit counseling is one of the least confrontational ways to get credit card debt relief. It is the safe thing for financial professionals to reference on line, on TV and radio, in print, or in person. The nonprofit debt consolidator helps you pay your full balances back to creditors, which is the right thing to do when that effort does not cause harm to you or your family.
There is also the sense of obligation for paying back debts (more on that later in the credit counseling article series). But blanket encouragement to seek out advice from consumer credit counseling services is, in my opinion, done out of laziness and/or a complete lack of understanding of how the repayment plans are structured with limited application and suitability.
Roughly 70% of people who call in to speak with a credit counselor cannot qualify to be served by a credit counseling agency.
The formula I provided in the first article in this series, and that is repeated a bit differently below, can show you in less than 5 minutes that credit counseling is not a good option for you, or how your budget is a good fit for using a debt consolidation plan to get out of credit card debt.
Mainstream media and financial pro’s waste the time of 70% of consumers they send to a credit counseling company. That waste is also enjoyed, at the same rate, by the credit counselors picking up the phone on the other end.
I can understand why people lean toward credit counseling instead of facing the reality that bankruptcy could be a better option, or that you may have to gut-out dealing with debt collection calls for a while, until you can settle your credit card bills. But I want to help you avoid wasting time and money committing yourself to a debt solution that can be identified upfront as not workable for you. So… let’s dig into credit counseling program drawbacks.
Missing a payment while working with a nonprofit debt management company.
If you agree to a monthly consolidated payment and start working with a credit counseling agency, but you later are unable to pay on time, you can lose the benefits you get from being enrolled in the plan. I provided a small look into how credit counseling works in the first piece in this series.
After missing a payment to the counseling agency, you may be able to get a creditor to give you a second chance, but not all will. Third chances are very rare. If you lose the lower payment benefit, you may find you are back where you started, but with somewhat lower balances owed on the accounts – depending on how long you were making payments.
If you make your new lower monthly credit card payments in your DMP for any significant period of time, and are suddenly unable to continue, you will have wasted time and money – both are a precious commodity in debt relief.
Wasting months or years in debt consolidation that ultimately does not work can be avoided.
You have $20,000.00 in unsecured debts and you are able to get your monthly payment down to $400.00 by enrolling in a credit counseling service. You make payments for 6 months, but then something unexpected occurs preventing you from continuing with the plan. You will have paid $2,400.00 over those 6 months. That money could have been used to help fund one or more negotiated settlements, or more than covered the costs of a chapter 7 bankruptcy filing.
Here is short video about when credit counseling can be, or should be, crossed off a short list of debt solutions:
Enrolling collection accounts with a nonprofit agency.
Depending on how long an account went delinquent before enrolling with the credit counseling service, and whether your account was with a debt buyer at the time you started your DMP, missing a debt management plan payment may mean losing interest rate benefits and having them reapplied retroactively.
I do not advise enrolling charge off credit card debts (typically accounts that are 180 days past due) into a credit counseling service unless, or until, there are more conforming account treatments when accounts are already placed with outside collectors. There are clearer benefits to using debt settlement as a method to resolving debts placed with a collection agency or sold to a debt buyer.
It is also important to know that not all credit counseling agencies train their counselors to understand collection accounts. Credit counselors are certainly not trained to help you understand alternative and creative ways to manage collection accounts at the same time you are dealing with accounts not in collection. This fact leads me to the next warning.
Debt consolidation with a nonprofit counseling agency fits into a box.
Debt management plans are not creative. They fit into four corners and cannot step out. Depending on your perspective, this fact can be seen as a major strength, or a huge weakness. I see it as both.
The limitations on who can budget to repay their debts through a counseling agency make the lines less blurry for you, and for the counselors that pick up the phones at these companies when you call in.
- A counselor cannot enroll you into a plan when it is obvious you run out of money before you run out of month (income is not enough to cover your monthly expenses and pay back your unsecured debt – like credit cards).
- This means calling a credit counselor can help you learn whether you qualify for debt consolidation, or can quickly cross it off the list of your available debt relief options.
There is nothing wrong with not qualifying for a debt management plan with a counseling agency. Knowing it won’t work for you means focusing on something that will.
Banks have preset criteria they give to the credit counseling companies who screen your income and budget to fit the lenders standards for payment and interest rate reduction. This is an unfortunate inflexibility.
- The preset criteria that are programmed into an agencies computer system only allow so much left over money each month.
- One bank may say they will reduce interest on their credit card to 6% if you have $300 left over after all bills are paid, while another bank won’t lower your interest rate much unless your budget shows you have $150.00 dollars left at the end of the month.
If you are only marginally suited to sign up for a credit counseling services debt management plan, or have a fluctuating monthly income that makes your monthly budget more like guess work, than credit counseling repayment plans may not be right for you. Going ahead with one, when you are only left with something like $100.00 each month after your bills are paid, means you are one flat tire away from failing in the plan.
Should you still speak with a counselor and do a full income and budget analysis? Yes! Why?
- Its free
- There may be special reductions available with some of your creditors that you would not have learned about otherwise.
- There is no other way to get an accurate lower payment quote
With very little time invested, you could learn that credit counseling has solid potential to help you with your debt, or end the call knowing that the option cannot work for you – allowing you to cross it off the short list of debt solutions. You can save yourself (and a credit counselor) the time by using the example I gave in the first article in the credit counseling series to determine if your budget and bills are just too far gone.
The counselor you speak with is pretty much only going to offer details about what a debt management plan will look like for you. They are not allowed to cross into other debt solution territory like bankruptcy and debt settlement. So do not rely on them for feedback on your remaining options if a DMP cannot be offered to you.
Can a credit counseling service help you?
Credit counseling services have worked for millions of people over the years. There are many hundreds of thousands of people succeeding with their debt management plans while you are reading this. All of this detail should help you understand what credit counseling is, how credit counseling works, and whether it is an approach you can use to get relief from your debt. If you reach out to speak with a credit counselor at this point, it should be because you know you can budget between 1.7% and 2.5% of your combined credit card balances (and other unsecured debts), as your new lower monthly payment.
If you are faced with a situation where something has got to give in order for you to resolve your debt, you will find limited options. These options consist of the kinder, gentler, and non confrontational approach of credit counseling, all the way to bankruptcy. A good place to start learning which debt solution can work for you is be speaking with a certified credit counselor.
If you would like to connect with a credit counseling services provider with high standards for customer satisfaction call 888-317-8770 and speak with one now.
If you have questions or concerns about working with a credit counseling service, or are working with one now, post in the comments below for feedback.
In part 3 of the credit counseling series I am going to cover how you can implement your own DIY version of a credit counseling plan. Continue reading the credit counseling series – Banks offer credit card hardship payment plans.