The Truth About Credit Counseling

Key Takeaways
  • Credit counseling offers debt relief through a debt management plan or DMP.
  • You save money through lower interest rates and waived fees.
  • Failing to complete the program forfeits all creditor concessions.
  • DMP plans, through non-profit credit counseling agencies,have a 26% success rate.

Millions of people struggle with too much debt and are seeking relief. A way to lower monthly payments so you can afford to pay the rest of your bills. Then there is the long-term impact of owing more than you can afford. You resort to paying the minimum amount due on high interest, high balance credit cards, leaving you perpetually in debt.

How can you lower your monthly payment AND pay off your debt, allowing you to achieve some level of financial freedom?

Debt relief comes primarily through one of three avenues:

  • Credit counseling
  • Debt settlement or
  • Bankruptcy

Lenders promote credit counseling as the preferred debt relief option. But what is the truth about credit counseling? Is it really the best route when you are seeking relief from high-interest debt?

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How Credit Counseling Agencies Offer Debt Relief

Credit counseling agencies are typically non-profit companies that provide a range of services, including financial education, courses required for bankruptcy, and debt management plans or DMPs. A DMP can save money and help you get out of debt if you successfully complete the program.

How Debt Management Plans work

A debt management plan begins with a free credit counseling session to evaluate your income and debt levels and establish a budget. At the end of the credit counseling session, if it is clear that you cannot pay the bills, the counselor could recommend filing bankruptcy. If you have adequate income, the counselor will likely recommend enrolling in a debt management plan or DMP.

To qualify, you must have enough income to repay the total amount owed within five years. You save money through creditor concessions. Credit card issuers typically agree to charge you less interest on the outstanding balance, allowing you to pay down debt faster. In some cases, the company will also waive any recent late fees.

A DMP includes all high-interest credit cards and might consist of other debts such as medical bills, personal loans, or other unsecured payments. Once enrolled, creditors close accounts, which could harm your credit. The monthly payment due will depend on the outstanding balances and the discounts offered by creditors.

Why Credit Counseling and Debt Management Plans Fail?

According to the National Foundation of Credit Counseling, only 26% of people entering a DMP complete the program.

The challenge with DMPs is that creditors control the relief offered. The credit card company does not reduce the principal owed. It only reduces the interest charged going forward. The company may also waive recent fees due to late payments. The lower interest charges average 8%on the outstanding balance. The average monthly savings per DMP is $140. For many consumers, that is not enough of a payment reduction to make a difference.

The other challenge is that you only have 60 months to pay off all enrolled accounts. Without a reduction in principle, three out of every four people enrolled cannot meet the terms of the DMP and complete the program.

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How Failing to Finish Affects You

When you do not finish the program, you forfeit all creditor concessions. The interest rate reverts to the original contract, and waived fees are added back on accounts that are not paid in full at the time of the withdrawal. Since the agency makes a small monthly payment to each creditor, you will not pay off most accounts until the end of the program.

Alternatives When Credit Counseling Fails

If you cannot complete a debt management plan or have entered a DMP but cannot maintain the payment schedule, you may benefit from a debt settlement program.

Debt settlement gives you more control over the repayment process and can reduce monthly outlays by 50%. You can often negotiate new terms that can reduce the principal amount owed and allow you to get out of debt successfully.