Credit Counseling or Debt Management
Often referred to as CCCS
Credit Counseling is a
debt management program where you make a single monthly
payment to a debt counseling agency. In turn, that
agency distributes the money to your creditors on your
behalf, ideally at lower interest rates so you can pay
off the debt faster. Of all the available debt options,
Credit Counseling is by far the most popular, with
millions of Americans participating. Does this mean it's
the best choice for most people struggling with debt?
No! There are numerous problems with this approach, and
in recent years, Credit Counseling has come under heavy
criticism from impartial consumer groups and government
regulators. One of the most misleading aspects of Credit
Counseling is the "non-profit" status of most agencies.
Consumers often think that "non-profit" means there are
no fees involved, but this is not the case.
Another huge problem with Credit Counseling is the
divided loyalty of the agencies. Credit Counseling
organizations are dependent on creditors for the
majority of their income (in the form of kickbacks of
7-15% of the monthly payments), yet the agency
supposedly represents the consumer. How can the consumer
expect truly objective advice from an agency that
directly accepts compensation from his or her creditors?
That's why one of the criticisms of the Credit
Counseling industry is that it acts like a big
collection agency for the credit card banks.
Also, even if these problems are taken into account, the
simple fact remains that at least three out of four
people who start a Credit Counseling program do not
complete it. Yet you'll rarely hear anyone from the
industry or financial media discuss the alarming failure
rate of Credit Counseling programs.
The basic problem here is that the math doesn't make
sense for the average consumer who's struggling with
their monthly payment load. An example will help to
clarify this problem. Let's assume you owe $25,000 in
credit card debt at an average interest rate of 20%,
with minimum monthly payments of $500. It will take
about 9 years to pay off the debt with this structure,
assuming you don't miss any payments and start getting
hit with late fees.
After enrolling in a Credit Counseling program, how much
better off will you be? It all depends on how low the
agency can get your interest rates. Lately, the banks
have squeezed the industry, so the discounted rates are
not as attractive as before. We'll use 12% as the new
average. So if you keep your payments at $500 per month
as before, how long will it take you to get out of debt?
First, we need to deduct the fee charged by the agency.
We'll be conservative and only allow for $25 in monthly
fees, so $475 of your $500 goes toward debt payments. On
paper, it looks a little better, with a payoff time of
75 months (6 years, 3 months) to become debt-free.
Here's the problem though.
happens if you can't keep up with that $500 per month?
After all, you sought debt help because you were
struggling, right? Let's say you drop down to $450 per
month. Now you're looking at 90 months (7 years, 6
months), which is not much better than the 9 years you
started out with. Cut your payment even farther, and
you're right back where you started from. Bear in mind
here that in our example, we're assuming you're working
with a top notch Credit Counseling agency that charges
low fees and obtains greatly reduced interest rates for
your accounts. Yet even with the best of agencies,
you're still looking at a 5 to 9 year program to get out
of debt. That's why most folks never complete these
Credit Counseling does not tackle the root cause of the
debt problem itself, which is the principal balance
owed. That's why this method doesn't work for most
debt-burdened consumers. Most people struggling with
debt simply cannot afford to pay back the full balances,
plus interest and agency fees. This debt solution might
be helpful during a short-term financial situation, but
over the long-term, $25,000 of debt is still $25,000 of
reducing the interest rate a little does not provide
enough debt relief for
the average consumer.
Our job at Liberty
Financial Management is not just to counsel you on your
debt problems, but to help you do away with them
entirely. People often don't read the fine print when
applying for a credit card. Credit card companies try to
lure you in with promises of a low APR and no balance
transfer fees, but there is usually a lot more at stake.
For instance, did you know
that your credit card company can raise the APR at their
own discretion? Even if you make the monthly payment on
time, your APR can go up. What this means is that you
could be paying more towards the interest and less
towards the actual debt, and your debt will continue to
rise. Many people don't even read their bills from month
to month, they just look at their monthly minimum and
sign the check.
Even if you are deep in
debt with one credit card company, you will still
receive offers for new credit cards on a daily basis.
People try to pay off credit cards with new credit cards
and before they know it, they're even more deeply in
debt. We have seen this over and over again. You start
knee-deep in debt and in a very short period of time,
you are in way over your head. For many people, credit
card debt is a way of life, but it doesn't have to be
We are more than a service
that can remove or reduce your debt--we are consumer
advocates. It is our job to fight the credit card
companies that are in the business of creating debt for
those people who can afford it the least. Liberty
Financial Management is not just about saving you money;
we're about giving you peace of mind. We're in the
business of helping people, and we like what we do.
Contact us to see what we can do for you.
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