With the economic downturn, many people have turned to credit counseling services as a solution to their credit card debt problems. Although credit counseling can be helpful, there are many criticisms of the credit counseling process and you should be aware of potential problems before committing to any credit card debt solution services.
Credit Counseling Compensation
One of the strongest criticisms of the credit counseling industry is that very often, the counseling services receive compensation from credit card companies themselves as payment for their services. This practice has lead to accusations that consumer credit counseling services serve as de facto collection agencies for creditors. In order to participate in a debt relief program, the consumer pays a single monthly payment to the counseling service, which then makes payments to individual creditors on their behalf. Credit card companies pay what is called a “fair share” fee to credit counseling companies and this fee accounts for approximately $5 billion in fees annually paid to credit counseling organizations.
Hidden Fees
Another criticism of the credit counseling industry is that there are often hidden fees that are not disclosed to consumers when they sign up for debt relief services. Both the Federal Trade Commission and Better Business Bureau report literally thousands of complaints about credit counseling agencies. Frequent complaints include the inability to “opt out” of what are supposed to be voluntary programs, undisclosed fees being charged and payments made not being applied to consumer accounts.
Effect on Credit Rating
Participation in a credit counseling program is not supposed to affect your credit rating. However, one of the strongest criticisms about the credit counseling industry is that participation in one of their programs is reported to credit reporting agencies. As a result, not only are credit card accounts usually frozen or cancelled, but potential creditors will consider you a higher risk and may be reluctant to grant credit.
Although consumers usually eventually see an improvement in their credit rating once their credit card balances are significantly reduced and regular payments are made, future creditors view participation in a credit counseling program as an indication of problems with making credit payments. This can result in difficulty obtaining credit for purchasing a home or a car, or in higher interest rates being charged.
If you find yourself mired in credit problems and are having difficulty making your credit card payments, there are numerous alternative solutions to working with a credit counseling company for debt relief. Consider talking directly to your credit card companies and trying to negotiate a reasonable payment plan or single payment settlement. As a final option, you might also consider bankruptcy as a solution if your credit obligations are large and it is clear you will not be able to recover from them.