"Cut Your Payments in Half!" the headline screams. "Consolidate Your Bills into One Low Monthly Payment!"

When you see ads like this, they are often from Credit Counseling firms. In this article, I'll explain the principles behind the Credit Counseling approach and discuss the main problem consumers face when they join one of these programs.

First, let's get our definitions straight. The term "Credit Counseling" is actually quite misleading, since it has nothing to do with preserving or improving your credit score. In fact, Credit Counseling will often damage your credit, an unpleasant reality that is sometimes downplayed by industry representatives.

Credit Counseling is a debt management program where you make a single monthly payment to an agency. In turn, that agency distributes the money to your creditors on your behalf, ideally at lower interest rates so you can pay off the debt faster. Credit Counseling should not be confused with Debt Consolidation, Debt Settlement, or Debt Termination. Each of these debt programs takes a very different approach from Credit Counseling.

Of all the available debt options, Credit Counseling is by far the most popular, with millions of Americans participating. Does this mean it's the best choice for most people struggling with debt? No! There are numerous problems with this approach.

In recent years, the Credit Counseling industry has been heavily criticized by impartial consumer groups like the Consumer Federation of America. But these criticisms often miss the mark entirely. They usually focus on the aggressive companies that use their non-profit status to trick consumers into thinking they are charitable organizations, or even that their services are free of charge. In reality, these outfits charge hefty "voluntary" contributions, often adding up to hundreds of dollars, plus steep monthly fees as well.

However, I'm not talking here about the bad companies who provide little or no actual "counseling," or the ones that are only in business to make their owners rich. No, I'm talking about serious problems with the actual business model itself. So let's take a closer look at how Credit Counseling works.

Let's say you owe $25,000 on several different credit cards. Let's also assume your average interest rate before you enrolled was 20% (which is actually low these days, especially if you've missed any payments). Your minimum monthly payments are $500, which you've been struggling to keep up with. At this rate, it will take a whopping 109 months (more than 9 years) to pay off your debts, assuming you don't miss a single payment along the way.

You enroll in a Credit Counseling program that promises to get you out of debt faster. But does it? Assuming your creditors agree to participate in the program (not always the case), the real key is the concession they will grant on your interest rates. In prior years, creditors looked more favorably on Credit Counseling and they offered steep discounts off the normal interest rates. But lately they have squeezed the industry, and the concessions are not so good any more. Currently, most of the major players will reduce interest rates down to a range of 7% on the low side to 18% on the high side. We'll use 12% as the average.

So if you keep your payments at $500 per month at the new 12% rate, how long will it take? First, we need to deduct the monthly fee charged by the agency. In this example, we'll use a fee of $25 per month, so $475 of your $500 will go toward debt reduction. The good news is you'll be out of debt faster. The bad news is that it will still take 75 months (more than 6 years) to become debt-free.

But what happens if you can't keep up with that $500 per month? After all, you sought help from a credit counselor because you were struggling financially, right? Let's say you drop down to $450 per month. After deducting the $25 monthly fee, that leaves $425 toward your debt plan. Now you're looking at 90 months (7 years & 6 months), which is not much better than the 109 months you started out with.

So how can credit counselors claim to cut your payments in half? Good question. If you dropped down to $250 per month, you'll never pay off your debt! At 12% interest, the debt will climb faster than your $250 per month can reduce it. The lowest you could go would be $300 per month. However, it would now take 20 years to pay off the debt, hardly an improvement!

In order to truly cut your payments in half, down to $250 in this example, the agency would need to completely eliminate all interest! And even then, it would still take more than 9 years to pay off the balance! So the ads claiming you can cut your payments in half are simply false.

Bear in mind here that in our example, we're assuming you're working with a good company that charges low fees and actually obtains good interest rate concessions from all of your creditors. Even with the best of credit counselors, you're still looking at a 5-9 year program to pay off your debts.

That's why Credit Counseling is usually only effective for people with short-term financial problems. Consumers with long-term financial instability have trouble keeping up with the regular payment stream required to make these programs work. The result? Even the most favorable statistics show that about 3 out of 4 people drop out of Credit Counseling programs before completing them.

If you do decide to join one of these programs in order to obtain some short-term relief, be sure to do your homework first. Here are a few tips to help in your selection:

1. Look for a company that actually provides old-fashioned budget advice and counseling. If they want to sign you up right away without first understanding your budget situation, move on!

2. Obtain copies of the contract and read it carefully before signing up. Make sure you understand all of the fees involved. Are there enrollment fees? "Voluntary" contributions? Monthly fees? Extra fees per account? These hidden fees can add up to big bucks.

3. Make sure they work with all the creditors on your list and not just some of them.

4. Don't be fooled by "non-profit" status. That doesn't guarantee you're dealing with a good company. And it certainly doesn't mean the service is free!

5. Aim to find a local company that you can visit in person. Check out your target company with the local Better Business Bureau.

6. Make sure they provide support after the sale. Try calling their customer service number to see if you can get through promptly.

Remember, you can eliminate your debts if you take a disciplined approach to your finances, make a budget and stick to it, and don't use your credit cards unless you can pay off new balances in full each month.

Good luck in your financial future!

Charles J. Phelan has been helping consumers become debt-free without bankruptcy since 1997. A former senior executive with one of the nation's largest debt management firms, he is the author of the Debt Elimination Success Seminar™, which provides comprehensive instruction in do-it-yourself debt settlement that saves $1,000s in fees.

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