Financial Resource

Article by Terry Price

There is one topic which everytime I write about it seems to generatesome hate mail while at the same timespawning a flurry of wonderful praisefrom consumers. Of course, the hatemail is always from a few people thathappen to own these “certain types” ofbusinesses I discussed and thosebusinesses of course are CreditCounseling or Debt Consolidationcompanies; of which many “claim” to benon-profit organizations.

You’d almost have to be an ostrichwith your head stuck in the sand to notsee or hear at least one advertisementa day from a Credit Counseling or DebtConsolidation Company. However, youcan expect this to change and changesoon. Since this is a topic whichtends to “stir up” the owners of thesebusinesses, I am going to take adifferent approach by NOT sharing myopinion, but rather, the opinion ofothers. I will start with the newsmedia and the Internal Revenue Service:

“(NPR News, May 15, 2006). TheInternal Revenue Service is revokingthe tax exempt status of some of thelargest credit counseling agencies inthe country. An IRS investigationdisclosed that the firms solicitedbusiness from people seriously in debtand that they didn’t provide counselingor consumer education, as required.

Prodded in part by a congressionaloversight committee and consumeradvocates, the IRS began investigatingdozens of credit counseling agencies –most holding non-profit status — twoyears ago. IRS Commissioner MarkEverson says the companies “poisoned anentire sector of the charitablecommunity.”

Everson says in many instances,companies were organized merely tofunnel business to loosely affiliatedfor-profit companies. Many of the firmsspend millions of dollars oncommercials that urge anyone with debtto call them to solve their financialwoes. And because tax-exemptorganizations are not bound by thefederal do-not call list, the firmswere able to randomly call consumers,pitching their services under the guiseof a non-profit counseling service.

The IRS investigations are alsolikely to affect consumers, thanks to anew bankruptcy law that requiresconsumers considering bankruptcy to getcounseling before they are allowed tofile. The IRS wants to ensure that onlylegitimate non-profit agencies aredoing the counseling. In addition tothe actions announced Monday, the IRSis sending more than 700 complianceletters to the rest of the creditcounseling industry (END).”

Since almost all Credit Counselingand Debt Consolidation companies claima non-profit status, I feel mostconsumers are easily sucked in withtheir skepticism and defenses at bay. After all, when most of us hear theword “non-profit” the first thing weusually think of is a church orhomeless shelter.

From the NPR article and theactions of the IRS, I think it’s fairto assume that many of these “non-profit” organizations have beenoperating under a scenario similar tothat of a wolf guarding a hen house. However, this doesn’t mean all creditcounseling and debt consolidationcompanies are bad but… you do need toknow the truth about how they operateand their limitations.

The first thing you want tounderstand is these companies are ALLmore interested in making money off youthan they are in preserving your creditrating. The bottom line with eithercredit counseling or debt consolidationis that it absolutely ruins yourcredit. I can just hear the companiesarguing this with a consumer right now,telling them nonsense like “It helpsyour credit since it tells creditorsthat you’re working on your situationand not just running away from it.” Listen… if one these places tells youthat than watch out. Why? Becausethey will lie to you about other thingsas well!

One of the first actions theseprograms usually requires you to do isfor you to CLOSE all your revolvingcredit accounts. You then makepayments to the organization and theytake care of everything for you. Whatthis says to all your creditors (aswell as anyone considering giving youcredit) is that you are so out ofcontrol with your finances that youcan’t even manage paying everyone backon your own. Therefore, you’re hiringsomeone else to do it for you!

99% of the time these companieswill claim they can negotiate with yourcreditors and get interest ratesreduced thereby saving you money. While this is true, what’s also true isyou can easily negotiate these samerates as well as they can by justcalling your creditors yourself. You’dbe amazed at how many of your creditorswould love to hear from you (especiallywhen the chips are down!). Not toomention, any money the counselingcompany was to save you would more thanlikely be sucked back up by theirmonthly fees (usually around 0 to,000 per year).

This brings us into a whole otherdynamic of their business model. Because these companies always maketheir money off of monthly fees paid bythe consumer, the longer they can keepthose monthly fees coming in the moreprofitable their business will be. It’s for this reason that mostconsumers who sign up with thesecompanies usually find themselves onpayment plans with the lowest monthlypayment possible (which turns out toalso be the LONGEST payment plan aswell). Not surprising is it?

Am I against Credit Counseling andDebt Consolidation companies? Absolutely not. After all, there aremillions of people in America who willnever be able to manage their finances.Credit to them is a destructiveaddiction much like alcohol or drugsand they will never be able to controlit. Instead, it will always controlthem. We’ve all seen these people. Every time they are extended creditshortly thereafter they are infinancial trouble (usually blaming iton some external factor). For thesepeople I think these credit and debtcounseling programs can be a good thing(as a ruined credit report is not ahindrance to them but actually anasset). It keeps them out of futurefinancial trouble by forcing them tolive their lives on a “cash and carry”basis; which is ultimately conducive toa better standard of living down theroad.

On the other hand. If you’re goodwith your finances and have controlwith credit but went through some typeof hardship beyond your control in thepast (i.e. divorce, job loss etc); thenthe services of these companies willnever be for you. You will do farbetter and preserve your credit ratingby taking matters into your own hands. Reason being is that you understandyour credit rating is a powerful toolthat can help you move ahead faster,help others and help yourself as wellas create the life you want. It allcomes down to self management. We allknow that those who cannot managethemselves will ultimately be managedby others. Credit is no different. When you learn to manage it well, youare the master and it is the servant.

If you care about your credit andwant to benefit from it in the future,then you will never rely on a credit ordebt counseling service to help you getout of any trouble you find yourselfin. Instead, you’ll look inward andget yourself out while preserving yourcredit rating the best you can. Creditand debt counseling is for people whoare “ok” with throwing their creditrating in the trash so they can have”someone else” manage their paymentsfor them (since they are unable tomanage them themselves). And again, asfar as negotiating interest rates, youcan do just as good as them or better. If you don’t believe me just call anyof your creditors and straight out tellthem your situation. You will quicklyfind you don’t need to be afraid ofthem. They just want to get paid likethe rest of us.

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