Credit Counselors: Friend or Foe?

The typical role of a credit counseling service is to negotiate lower payments with your creditors on your behalf and pay the bills for you.  In the end, you send the credit counseling service a check once a month to cover the total cost of all negotiated fees, which usually includes a fee for the credit counseling service (even non-profits have to make money).

There are two problems with this approach: (1) A lot of what they do for you, you can do yourself!  Basically, your creditors want to be paid. They don't care who pays them; and (2) If you are truly downright broke, how in the heck can you muster up enough funds to pay your creditors even a negotiated rate!

 Credit counseling is best suited for people who: (1) have some money and haven’t reached the optimum level of "brokeness"; (2) just can't seem to organize themselves enough to pay their bills; or (3)  are just plain afraid to talk to their creditors.  For everyone else, it fails most of the time.

One woman (let's call her Sue) found herself struggling with a $1,000 credit card debt that accumulated to close to $3,000 due to late fees and collection charges.   Sue was unable to pay anything toward eliminating the debt.  Finally, three years later, Sue’s finances improved.  She acted as her own credit counselor and contacted the creditor.   They negotiated a lump sum pay-off of $1,000.  Part of the deal they negotiated included a written statement from the creditor detailing their agreement and a promise to remove negative information from her credit file. As soon as Sue obtained the written agreement from the creditor, she promptly paid the $1,000 with a cashier's check saving herself nearly $2,000 in late fees and cancellation charges. After the success of this negotiation, Sue was able to make similar arrangements with other creditors. Remember, Sue could not pay her bills for years, but once she got back on her feet, and her finances improved, she was able to pay her delinquent bills. 

A lot of creditors look favorable on a person who is trying, plus something is better than nothing.   However, there are some creditors who are less likely to negotiate a lower pay-off if the debt is relatively new or they know you need to wipe off the old debt to buy a new house, but usually some type of payment arrangements can be made.

I'm sure, there are people who have benefited from credit counseling, but in order to benefit you must have some money to pay your bills, and if you have some money to pay your bills, then perhaps you can negotiate your own way out of your financial crisis.  It's you're choice.

 A final note about credit counseling to consider.  It can appear on your credit record as “debt management” and once again, you are subject to being prejudged.