Debt Fast Track

Beware the Credit Card Consolidation Loan

If you are looking for debt solutions on the internet, you have undoubtebly come across companies and headlines promoting “Credit Card Consolidation” and “Credit Card Consolidation Loans”.  Be warned – this is just common verbiage for Credit Counseling.  I am not here to say that credit counseling does not work.  If you have a poor credit history, and would be able to catch up on your payments if you had a slight reduction in payments, this may be the system for you.  However, I find it more than a little curious that the credit counseling industry goes to such great lengths to mislead the public in their advertising.  Why not just tell the truth about how the system works?  The obvious answer is that it all looks a whole lot less attractive once the truth is told.  Here are some things you should know about the credit counseling industry in general:

• Credit counseling service agencies do not consolidate debt.  They will manage your debt payments for you on your  non-secured debt only.  You will make only one payment to them, and they will disseminate the payments for you.  From that standpoint, it may seem like a consolidation, but you still have all of your same creditors.
• CCS agencies also send out large batch payments to the creditors that they work with.  If you have a payment to a large financial institution, your payment will be combined with that of several other ccs clients.  The problem: this system is historically fraught with problems reconciling payments between the various ccs clients.  It is quite common in this system to send in your payment as per agreement, and not get the credit for it.  It can be quite a headache to get it all straightened out.
• Your ccs agency will negotiate with creditors to lower interest rates and payments on your credit cards as long as you stay current with the revised agreement.  If you do not stay current, the creditor will reserve the right to raise the interest rate well beyond the original rate you had before approaching the ccs service in the first place.  How many people stay with the ccs agency for the full payoff of their debts?  Not very many.  Less than 10%.
• CCS agencies get their primary income from the creditors.  They will charge you an up-front fee of $350 or less, and a monthly fee of $50 or less , but their primary source of income is from what they call “Fair Share Collections”.  That is right – they effectively become the collection agency for the creditor.  They generally keep anywhere from 10-15% of each payment you make as a collection fee.  Who are they really working for?
• It is not uncommon for people to report to me that their ccs agency told them that they would be able to make a better deal if they were late on their payments.  Such advise should never be heeded.  This will have an adverse effect on your credit scores, and is less than honest if you are able to make payments on time.
• It is also common for ccs agencies to make a big deal out of their non-profit status.  In the US, non-profit is often confused with charitable organizations.  However, non-profit merely means that  the company cannot make profits.  The employees, however, can make incomes – sometimes very large.  The bottom line, these are businesses, and operate as businesses.

So, as I am sounding very negative on credit counseling, let me know say that they do provide a valuable service in many circumstances.  If you need a payment reduction to make your payments going forward, and you have significant non-secured debts, it may be the right service for you.  I just wish they would tell you the way it is.