Consumer Debt Problems:
The TRUTH about Consumer Credit Counseling (CCC)
These organizations can be found under many names from Consumer Credit Counseling, Debt Consolidation, Debt Management or "Make Only One Payment" Companies.
CCC companies were established back in the early 80's when banking laws changed and credit card debt became far easier to accumulate. As the public amassed greater and greater personal debt the banks took note that many customers were now having problems making their minimum payments and were starting to default on their debts.
At that point in time there was very little a consumer could do to get financial relief except for filing bankruptcy. As an alternative to bankruptcy and a complete loss of their profits the banks helped to establish and fund CCC organizations. This enabled them to recover their money and was designed to help those people struggling to make ends meet.
Established as separate organizations from the creditors, the CCCs were funded by monthly service charges as well as a percentage of what they collected. This percentage worked like a collection fee and was at that time normally around 15%. The CCCs incomes were based upon how much they collected and also by how many monthly or ongoing service fees they could charge.
Since then, many types of CCC organizations have sprung up. Besides the nonprofit or not-for-profit Consumer Credit Counseling companies there are also CCC companies that go by the name of "Such and Such Consolidation Company". This can be confusing because these companies do not make consolidation loans. Consolidation, in this case, refers to the act of "consolidating" your many payments into the one payment you pay to their company — just like any other CCC company.
There are also CCC companies out there that state they lower your payments by "negotiating" down the interest rates and payments on your behalf. They do not negotiate your interest rates down. These companies are still a variety of CCC and as such already have pre-established interest rates that individual creditors will allow. (Don't be confused — this type of company NEVER negotiates down the principal balance of your debt.)
As stated earlier, these CCC organizations basically work for the creditors — not you — just like a collection company. In addition to what the creditors pay the CCC company, they charge you a monthly service fee for dispersing your money to your creditors. Until recently these companies were paid a commission of around 12% to 15% by the creditors for recovering the debt for them. That means for every dollar you gave to them, the creditor was giving 15 cents back to the CCC company. This changed in 1999. According to an article in the Los Angeles Times "too many people were using CCC companies just to lower their interest rates" and as a result the creditors were cutting the commissions paid to the CCC companies to 8%. (Does this make sense to you? In our experience, people will do almost ANYTHING to hold on to their credit cards and if they are willing to give them up — they are in real trouble!)
The net result of cutting the commission to CCC programs was that many of the CCC companies became unstable (thus the poor reputation that ensued). Some of them could not make the consumer's payments to the creditors on time or, in rare cases, at all. Consumers started seeing late charges accumulate, and some cases payments were either far less than what was agreed to or some payments were missed altogether. (This situation seems to have been corrected to some degree now.) Some CCCs were shut down for their relationships to “For Profit” marketing companies owned by friends or family members who received large fees for client acquisition, thus skirting the “non-profit” rules of a CCC.
A CCC organization works by looking at your income, all of your regular expenses and your debts. Then, they let you know what they think they can do for you or if they can accept you. They have predetermined figures from each creditor as to what interest rates and payments they are able to agree to. The interest rate will average around 8%. Some creditors will lower their rate to 0% while others will not go below 20% to 25%. Not all of your cards may accept the plan. (Several well-known and commonly held cards refuse to work with ANY CCC company.)
The main problem with CCC programs, and the main reason for failure in this type of program is that your monthly payments are usually going to be higher than your original minimum monthly payments AND you are going to have to SUSTAIN that payment for many years. If you are already having problems making your minimum monthly payments now, how are you going to afford a higher amount over a period of many years? For this reason it is very rare that anybody will complete the program in the specified time originally stated (4 to 5 years).
In many cases, it takes up to three times as long as the original estimate to complete. The majority of people will drop out or be dropped at some point from the program for not being able to keep up with their payments. Having no other alternative other than filing bankruptcy, these people will try to sign up with a new CCC program and the clock starts all over again (with a slightly smaller payment). Many people fall off the program two or three times, thus extending the original 4 to 5 year plan to 7 to 12 years!
Because of the extended time period to repay their debts, their credit card balances do not change significantly over a period of many years and the consumer feels like they have just fallen into yet another type of trap. Approximately 65 - 70% of the people who enter a CCC program are unsuccessful and fall off before the program is complete. These aren't very good odds!
The Three main complaints with CCCs are:
1) The high monthly payments.
2) Lack of headway made on account balances.
3) Payments not being made on time and late fees accruing.
This type of program is effective, however, for people who want get out of the debt trap and can afford to make slightly higher monthly payments (around 3% higher) and can do this relatively comfortably for the next 3 to 5 years. If you can continue to pay the higher monthly payments and do not foresee future financial problems this can be a viable way to go. If you are currently struggling to make minimum monthly payments however, the odds are that you will not succeed using this method.
Despite marketing efforts and glowing remarks to the contrary, CCC programs do affect your credit report, so don't be mislead. When you are accepted into a CCC program your creditors will close your accounts and report this to the credit bureaus. Additionally, nearly all creditors will report to the credit bureaus that you have entered into a "hardship" program and need help. Although this is far less damaging than bankruptcy, it definitely does impact your credit rating — don't let anyone tell you otherwise — it just isn’t true
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