You're in debt and need help. You are watching TV late at night and low and behold, there is an ad from a company offering to help. They are a non-profit organization with a mission. Sounds wholesome enough. But wait, there is a lot you should know before you make the call and sign up for their services.
These organizations claim that they will negotiate lower payments and lower interest rates with your credit card companies. You will have to make one simple payment and they will do the rest.
But this is not the whole story.
First, what these companies do can hardly be called negotiating. As a matter of fact, I would argue that they work for the creditors, not for you- the consumer. Here is why. They receive a great deal of their funding from the same credit card companies that they will probably be negotiating with. Also, credit card company executives sit on many of their executive boards. But the biggest argument against their claim to negotiate is that the creditors dictate the terms they will give you. Every consumer gets the same deal from each company. There are no negotiations.
Second, they will only accept you into their program if you are able to demonstrate an ability to meet the new payment arrangements. This is for the creditor's sake, not yours, because they are unable to play favorites among your creditors. In other words, they will not process a partial payment because that would force them to pick and choose which one to pay.
Third, they will often not suggest another strategy for dealing with your debt, as a true advocate would do, although it may be a better solution for your particular circumstances. As an agent of the creditors, they are not allowed to suggest bankruptcy as an alternative solution.
Fourth, non-profit does not mean no fee. These companies often charge an upfront fee in addition to a monthly service fee.
Fifth, do not expect much in the way of counseling or hand holding. They are essentially a payment mill and that is how they make money. In addition to the money they charge consumers, they also earn a percentage of every dollar they send to creditors (known as fair share contribution).
Also, what they often fail to mention is that your credit will be destroyed since making monthly payments to your creditors under a new payment arrangement. Anyone pulling your credit report will know that you are participating in a consumer credit counseling program.
Then, what are you supposed to do if you are in financial despair and facing mounting debt? Surprisingly, the answer may be to take on the challenge yourself. There is little they do that you can not do by simply communicating with your creditors. And with a little knowledge, you can diagnose your situation and determine if another strategy, such as debt settlement or even bankruptcy (as a last resort), may be a better fit. There are a number of books and self-help tools on the subject. If you prefer the best of both worlds, a coaching program may be the answer. It will likely cost significantly less than hiring a company and often improve your results.
So, when you hear the ad on the radio or TV, take a deep breath and resist the temptation to call, at least right away. First do a little research. Sometimes read a book or a report and decide the best course of action yourself. If you decide to use a consumer credit counseling company, at least you will do it with your eyes wide open.