Credit Counseling also known as a Debt Management plan is a service designed in the 70’s that is supposed to help consumers repay their debts. Usually the company is a non-profit, but the IRS is now revoking the non profit status since many of these companies are a scam. Credit Counseling was designed to close all of your credit cards, the consumer would make a monthly payment to the credit counseling company that would then distribute the payment for the consumer.

When a consumer signs up for Credit Counseling or a Debt Management Plan, a negative mark is then placed on the consumer’s credit report letting lenders know that the consumer was unable to pay their bills and had to hire a company to mange their bills for them.  This type of mark on the credit report is viewed by lenders the same as if the consumer filed for Chapter 13 Bankruptcy causing bad credit.

Since these companies became very popular in the 80’s and 90’s, many credit card companies began buying them and even starting up subsidiary credit counseling companies.  They claim to be able to reduce your interest rate on average down to 12%, the interest rate is typically only reduced for 6 months to a year, then raised again.

Credit Counseling companies make their money by charging the consumer a monthly fee for performing the bill paying service.  It is very common for Credit Counseling companies to “accidentally” miss the payment due date; then the consumer is charged late fees and penalties.  Why? The reason a company would miss the payment is to keep their client, the consumer in debt. The longer the consumer is in debt, the longer the Consumer Credit counseling company will get paid their monthly fee.

Credit Counseling companies also get paid a monthly fee from the credit card companies.  Now this is a conflict of interest because the Credit Counseling company is advertising they are going to help the consumer get out of debt but in reality they are working as a debt collection service for the credit card companies.  Who pays the credit counseling the most money?  The individual consumer or the large credit card company?  The answer is that credit card companies pay millions of dollars every year to credit counseling companies.  The consumer is not the real client.

A recent survey found 50% of all consumers who enroll into a Credit Counseling or Debt Management Plan never get out of debt as scheduled and end up canceling their agreement loosing all of the money paid in.  These companies do not reduce the overall amount of debt you owe; they only make the payments temporarily more affordable.

A Debt Management plan is a very costly plan if you are one of the few that will stick out the 5 to 10 years in debt. On average you will payback 140% of the amount you currently owe. Ex. If you owe $20,000 on credit cards, you will payback about $8,000 in fees and interest for a total of $28,000.  Although this may be cheaper that paying the high interest rates the credit card companies are currently charging, it is not an effective way of eliminating debt. 

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