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The Pros and Cons of Credit Counseling

By: Lisa Laprade
Published: October 2006

The walk to the mailbox gets longer with each passing day. When the phone rings, you get a lump in your stomach that rivals your first oral book report in 5th grade. You lie awake at night wondering if and how anything can get any better, as the collection calls and letters have already taken their toll on you. And things can only get worse, right?

Well, it depends on how you look at it and what you plan on doing about it.

We’ve all seen the countless television ads promoting credit counseling services, many of them “non-profit”, all claiming that they lower your monthly payment for any and all unsecured debt (such as credit cards and personal loans). These services work with your creditors to reduce or even eliminate your interest while combining all of your smaller bills together into one, easy-to-make payment. Instead of mailing out separate checks for individual creditors, a single payment is made by you to the service that in turn pays your debts. The balance on your cards will drop faster because your interest is lower or completely gone.

Besides your debt getting paid off faster, the unpleasant phone calls and letters from creditors with the words “Your urgent attention is required” as the heading are replaced by monthly statements showing your balance getting lower and lower, and perhaps even a congratulatory letter from a creditor commending you on your efforts to get out of debt. You feel as though you’re finally getting back on track, without the annoyance of outrageous credit card interest, late and over limit fees as part of your monthly budget.

The preceding has been some of the pros of using a credit counseling service. The following are some of the cons that you need to be aware of before signing a contract for such a credit counseling service-

After a few months of being under contract of a credit counseling service, your wallet seems to have a bit more cash, your bills seem a bit less, and you seem a bit happier as your balances are dropping right before your eyes. Life is great, until…

Let’s say that you needed a new car - nothing fancy, just a dependable means of transportation to get you to and from work. You apply for a loan, either through your local bank or credit union, directly through an auto dealer, or through one of those online specialty financial establishments. You feel pretty good about your financial situation, as you haven’t had a late payment in nearly a year. The loan officer pulls your credit. She has somewhat of a grimace on her face, “Oh - you’re in credit counseling I see.” But what she sees is quite different than what you were told when you signed up for credit counseling. Here’s why-

Believe it or not, when your creditors agreed to lower your interest rate and/or monthly payment to coincide with the credit counseling arrangement, they really weren’t happy about it, after all, they’re losing money. As long as you are making the agreed upon payment, your creditor cannot legally report negatively to the credit bureaus. But they can write a comment that says something to the effect of “Under Credit Counseling”. While this is not a derogatory statement, prospective creditors might just frown upon it (and you), and in turn, consider you a high risk for a loan. This translates into higher interest rates and loan payments. Some potential creditors have even been known to look at credit counseling services the same way they look at bankruptcy and your basic inability to pay.

But it doesn’t end there. Auto and homeowners insurance policy prices also coincide with your credit report and again, your inability to pay can make you a higher risk. Future employers may also pull a copy of your credit history, so your dream job may not become a reality as easily as you might think.

Some viable options to credit counseling would be a home equity loan or line of credit, if you own a home, or a personal loan designed with you in mind. The interest rate may be a bit higher, but you’ll have zero balances on your credit cards without the negative comments. With a lot of self-discipline and a bit of hard work, you’ll be on your way to a debt free life.

Certified Credit Counseling Service: CareOne Credit

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