The Myth of Credit Counseling Services

Consumer Credit Counseling Services (CCCS), Debt Free America (DFA), and other such “credit counselors” exist as non profit organizations designed to help consumers get out from under crushing credit card debt and get a new lease on life by living debt-free. The credit counselors work with your creditors to lower your monthly payments and reduce your interest charges. Or so they claim.

The truth is that using a credit counseling service can have as detrimental an effect on your credit rating as filing bankruptcy. In fact, it can be worse. The credit counselors will indeed work with your creditors and many creditors will agree to reduce interest rates and suspend late fees while you are on the program. Others will not. Being enrolled in a credit counseling program will not automatically cease collection activity or stop legal action from being taken. CCCS, DFA, and similar companies do not have a “magic wand” that will make all of your financial woes go away.

Is it Really a Non-Profit Organization?

Every debt management service provider that you’re likely to come across lists itself as a “non-profit organization.” Have you ever wondered why there are so many of them if no one is profiting? The truth is, these companies are a literal cash cow for their owners and officers. Each debt management company participates in something called “fair share.” They request a portion of the monies delivered to your creditors in return for getting you to pay. Not all the creditors comply, but many do. CCCS makes millions from fair share every year.

In order to keep their non profit status, the companies must show no profit at the end of the fiscal year. Income above their operating costs is funneled into equipment upgrades and lucrative bonuses for the companies’ owners, officers, and management.

Some of the companies charge a nominal fee for their services. Many others do not. If you’re using one of the ones that do and you’re short on your payment one month, the debt management company still collects their fee and will allow one or more of your creditors to go unpaid.

Debt management companies do serve some good, and have helped many people reduce and eliminate their debts. They also provide worthwhile information about staying out of debt to the public. If you’re considering using one, make sure that you research them thoroughly first and weigh all of your options before committing.



One Response to The Myth of Credit Counseling Services

  1. Clarky Davis says:

    This article makes a great point about the non-profit issue and fairshare contributions.

    An organization’s tax status should not be used as criteria to judge a reputable, effective debt management organization or credit counseling agency.

    What consumers should focus on is whether or not an organized is licensed by an appropriate state regulator agency and is accredited by The Better Business Bureau.

    While most organizations in the credit counseling industry are trustworthy and operate with integrity, there have been some bad actors. Consumers should definitely do their research before enrolling in a debt management program with a particular company.

    Thanks for addressing this issue!

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