When you see ads like this, they are often from Credit Counselling firms. In this editorial, I'll portray the principles behind the Credit Counselling approach & discuss the main issue consumers face when they join one of these programs.
First, let's get our definitions straight. The term "Credit Counseling" is actually misleading, since it's nothing to do with preserving or improving your credit score. In fact, Credit Counselling will often damage your credit, an disagreeable reality that is sometimes downplayed by industry representatives.
Credit Counselling is a debt management program where you make a single every month payment to an agency. In turn, that agency distributes the money to your creditors on your behalf, ideally at lower rates of interest so you can pay off the debt faster. Credit Counselling ought to not be confused with Debt Consolidation, Debt Settlement, or Debt Termination. Each of these debt programs takes a different approach from Credit Counselling.
Of all the obtainable debt options, Credit Counselling is by far the most popular, with millions of Americans participating. Does this mean it is the most suitable choice for most people struggling with debt? No! There's numerous issues with this approach.
In recent years, the Credit Counselling industry has been heavily criticized by neutral consumer groups like the Consumer Federation of The united states. But these criticisms often miss the mark entirely. They usually focus on the aggressive companies that use their nonprofit status to trick consumers in to thinking they are charitable organizations, or even that their services are free. In point of fact, these outfits charge hefty "voluntary" contributions, often adding up to hundreds of dollars, and steep every month fees as well.
However, I am not speaking here about the bad companies who provide tiny or no actual "counseling," or the ones that are only in business to make their owners rich. No, I am speaking about serious issues with the actual business model itself. So let's take a closer look at how Credit Counselling works.
Let's say you owe $25,000 on several different credit cards. Let's also assume your average rate of interest before you enrolled was 20% (which is actually low these days, if you have missed any payments). Your maximum every month payments are $500, which you have been struggling to keep up with. At this rate, it will take a whopping 109 months (over 9 years) to pay off your debts, assuming you don't miss a single payment along the way.
You enroll in a Credit Counselling program that promises to get you out of debt faster. But does it? Assuming your creditors agree to participate in the program (not always the case), the actual key is the concession they will grant on your rates of interest. In prior years, creditors looked more favorably on Credit Counselling & they offered steep discounts off the normal rates of interest. But lately they have squeezed the industry, & the concessions are not so nice any more. Currently, most of the major players will reduce rates of interest down to a range of 7% on the low side to 18% on the high side. We'll use 12% as the average.
So in case you keep your payments at $500 per month at the new 12% rate, how long will it take? First, they must deduct the every month fee charged by the agency. In this example, we'll use a fee of $25 per month, so $475 of your $500 will go toward debt reduction. The nice news is you'll be out of debt faster. The bad news is that it will still take 75 months (over 6 years) to become debt-free.
But what happens in case you cannot keep up with that $500 per month? After all, you sought help from a credit counselor because you were struggling financially, right? Let's say you drop down to $450 per month. After deducting the $25 every month fee, that leaves $425 toward your debt plan. Now you are taking a look at 90 months (7 years & 6 months), which is not much better than the 109 months you started out with.
So how can credit counselors claim to cut your payments in half? Nice query. In case you dropped down to $250 per month, you'll never pay off your debt! At 12% interest, the debt will climb faster than your $250 per month can reduce it. The lowest you could go would be $300 per month. However, it would now take 20 years to pay off the debt, not very an improvement!
In order to truly cut your payments in half, down to $250 in this example, the agency would require to eliminate all interest! & even then, it would still take over 9 years to pay off the balance! So the ads claiming you can cut your payments in half are basically false.
Bear in mind here that in our example, we are assuming you are working with a nice company that charges low fees & actually obtains nice rate of interest concessions from all of your creditors. Even with the best of credit counselors, you are still taking a look at a 5-9 year program to pay off your debts.
That is why Credit Counselling is usually only effective for people with short-term financial issues. Consumers with long-term financial instability have trouble maintaining with the regular payment stream necessary to make these programs work. The result? Even the most favorable statistics show that about 3 out of 4 people drop out of Credit Counselling programs before finishing them.
In case you do choose to join one of these programs in order to get some short-term relief, be definite to do your home-work first. Here are a few tips to help in your choice:
1. Look for a company that actually provides elderly school budget advice & counselling. In the event that they require to sign you up right away without first understanding your budget situation, move on!
2. Get copies of the contract & read it carefully before signing up. Make definite you understand all of the fees involved. Are there enrollment fees? "Voluntary" contributions? Every month fees? Additional fees per account? These hidden fees can add up to large bucks.
3. Make definite they work with all the creditors on your list & not a quantity of them.
4. Don't be fooled by "non-profit" status. That doesn't guarantee you are dealing with a nice company. & it definitely doesn't mean the service is free!
5. Aim to discover a local company that you can visit in person. Check out your target company with the local Better Business Bureau.
6. Make definite they provide support after the sale. Try calling their customer support number to see in case you can get through promptly.
Keep in mind, you can eliminate your debts in case you take a disciplined approach to your finances, make a budget & stick to it, & don't use your credit cards unless you can pay off new balances in full each month.
Nice luck in your financial future!
First, let's get our definitions straight. The term "Credit Counseling" is actually misleading, since it's nothing to do with preserving or improving your credit score. In fact, Credit Counselling will often damage your credit, an disagreeable reality that is sometimes downplayed by industry representatives.
Credit Counselling is a debt management program where you make a single every month payment to an agency. In turn, that agency distributes the money to your creditors on your behalf, ideally at lower rates of interest so you can pay off the debt faster. Credit Counselling ought to not be confused with Debt Consolidation, Debt Settlement, or Debt Termination. Each of these debt programs takes a different approach from Credit Counselling.
Of all the obtainable debt options, Credit Counselling is by far the most popular, with millions of Americans participating. Does this mean it is the most suitable choice for most people struggling with debt? No! There's numerous issues with this approach.
In recent years, the Credit Counselling industry has been heavily criticized by neutral consumer groups like the Consumer Federation of The united states. But these criticisms often miss the mark entirely. They usually focus on the aggressive companies that use their nonprofit status to trick consumers in to thinking they are charitable organizations, or even that their services are free. In point of fact, these outfits charge hefty "voluntary" contributions, often adding up to hundreds of dollars, and steep every month fees as well.
However, I am not speaking here about the bad companies who provide tiny or no actual "counseling," or the ones that are only in business to make their owners rich. No, I am speaking about serious issues with the actual business model itself. So let's take a closer look at how Credit Counselling works.
Let's say you owe $25,000 on several different credit cards. Let's also assume your average rate of interest before you enrolled was 20% (which is actually low these days, if you have missed any payments). Your maximum every month payments are $500, which you have been struggling to keep up with. At this rate, it will take a whopping 109 months (over 9 years) to pay off your debts, assuming you don't miss a single payment along the way.
You enroll in a Credit Counselling program that promises to get you out of debt faster. But does it? Assuming your creditors agree to participate in the program (not always the case), the actual key is the concession they will grant on your rates of interest. In prior years, creditors looked more favorably on Credit Counselling & they offered steep discounts off the normal rates of interest. But lately they have squeezed the industry, & the concessions are not so nice any more. Currently, most of the major players will reduce rates of interest down to a range of 7% on the low side to 18% on the high side. We'll use 12% as the average.
So in case you keep your payments at $500 per month at the new 12% rate, how long will it take? First, they must deduct the every month fee charged by the agency. In this example, we'll use a fee of $25 per month, so $475 of your $500 will go toward debt reduction. The nice news is you'll be out of debt faster. The bad news is that it will still take 75 months (over 6 years) to become debt-free.
But what happens in case you cannot keep up with that $500 per month? After all, you sought help from a credit counselor because you were struggling financially, right? Let's say you drop down to $450 per month. After deducting the $25 every month fee, that leaves $425 toward your debt plan. Now you are taking a look at 90 months (7 years & 6 months), which is not much better than the 109 months you started out with.
So how can credit counselors claim to cut your payments in half? Nice query. In case you dropped down to $250 per month, you'll never pay off your debt! At 12% interest, the debt will climb faster than your $250 per month can reduce it. The lowest you could go would be $300 per month. However, it would now take 20 years to pay off the debt, not very an improvement!
In order to truly cut your payments in half, down to $250 in this example, the agency would require to eliminate all interest! & even then, it would still take over 9 years to pay off the balance! So the ads claiming you can cut your payments in half are basically false.
Bear in mind here that in our example, we are assuming you are working with a nice company that charges low fees & actually obtains nice rate of interest concessions from all of your creditors. Even with the best of credit counselors, you are still taking a look at a 5-9 year program to pay off your debts.
That is why Credit Counselling is usually only effective for people with short-term financial issues. Consumers with long-term financial instability have trouble maintaining with the regular payment stream necessary to make these programs work. The result? Even the most favorable statistics show that about 3 out of 4 people drop out of Credit Counselling programs before finishing them.
In case you do choose to join one of these programs in order to get some short-term relief, be definite to do your home-work first. Here are a few tips to help in your choice:
1. Look for a company that actually provides elderly school budget advice & counselling. In the event that they require to sign you up right away without first understanding your budget situation, move on!
2. Get copies of the contract & read it carefully before signing up. Make definite you understand all of the fees involved. Are there enrollment fees? "Voluntary" contributions? Every month fees? Additional fees per account? These hidden fees can add up to large bucks.
3. Make definite they work with all the creditors on your list & not a quantity of them.
4. Don't be fooled by "non-profit" status. That doesn't guarantee you are dealing with a nice company. & it definitely doesn't mean the service is free!
5. Aim to discover a local company that you can visit in person. Check out your target company with the local Better Business Bureau.
6. Make definite they provide support after the sale. Try calling their customer support number to see in case you can get through promptly.
Keep in mind, you can eliminate your debts in case you take a disciplined approach to your finances, make a budget & stick to it, & don't use your credit cards unless you can pay off new balances in full each month.
Nice luck in your financial future!
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