Consumer Credit Counseling Scams

You've done it. You've come to the same point in your financial life as millions of people before you. You have overextended your credit and cannot make all the payments necessary. Your creditors are hounding you to pay the bills, and you can't afford to pay them all. Is it time to call one of the numbers on those commercials for consumer credit counseling? What can they do for you? Obviously, the sales pitch sounds appealing, but how true are the claims? What is the real impact on your credit?

THE PITCH - When you see the commercials for consumer credit counseling, the sales pitch is amazing. Consolidate your bills into one low monthly payment! Never worry that this credit card bill can't be paid or that other payment will be late. Make one affordable payment to the credit counseling service, and they will divert the funds to all of your bills as necessary to keep everyone satisfied. You will have no more bill collectors calling you daily, hounding you for payment. Is it to good to be true?

WHAT HAPPENS - The process by which a consumer credit counseling service consolidates your bills can actually be more damaging than helpful. Essentially, the service will have you collect information on all of the bills you wish to consolidate and turn it over to them. They will request information on your income and help come up with a monthly payment that you can afford. They will then contact your creditors, inform them of the consolidation, and set up slow payments. This will get the bill collectors off your back and usually stop compounding of interest on accounts, but it can also affect your credit. Also, rolled into this payment is a fee for the service that the consumer credit counseling service keeps for itself.

REALITY CHECK ON YOUR CREDIT - Understand that, if you allow the counseling service to "slow pay" your creditors, your credit score will be reduced, and your credit report will be severely tarnished. While you will live more comfortably, knowing that all creditors are receiving payments, no one is hounding you for money, and you can afford your monthly payment, your creditors are reporting you as either a "charge off" or a "slow pay" to the credit bureaus, which are just as negative as "delinquencies".

OTHER CONCERNS - If you choose to consolidate your debt, do not count on credit cards to help you in the future. Once you have consolidated a credit card debt, you cannot allow yourself to rack up a new bill. This makes the consolidation useless because you are essentially adding expenses rather than reducing them.

A BETTER WAY TO GO - If you really want to reduce your credit card payments and other bills, you can essentially perform the same service for yourself rather than contact a consumer credit counseling service. Start by contacting one of your credit card companies and discuss with them the possible need to close the account (yes, you must close it so that you cannot charge the card back up) and reduce the payments. Be sure to let them know your desire to pay what you owe, but emphasize that you are unable to secure the current monthly minimum payment and need assistance lowering that payment. Sometimes, this approach, rather than utilizing a consumer credit counseling service, will reduce the effects on your credit report, since you have made personal contact in an attempt to adjust the requirements rather than slow-paying or charging off the account.

Most credit card companies can work with you and, while you may not be able to reduce the cost as significantly as a counseling service, you can save some of the negative repercussions that a counseling service can incur, and you can still make your account payments more manageable than they currently may be. If you feel that you do not have the discipline required to handle this type of arrangement yourself, perhaps the service is your best option. In the end, they will reduce your obligations and eventually help you to be debt-free.