The third variation on “debt consolidation” is not really consolidation at all in the true sense of the word, as described above. Instead, you are enrolled into a Consumer Credit Counseling program. You meet with a counselor who analyzes your monthly budget. The counselor then makes contact with your creditors and attempts to get them to lower the interest rate temporarily. You make one monthly payment to the counseling agency, which then disburses the funds to your various creditors.
The theory here is that your overall payment per month is lower due to the counselor’s success at obtaining lower interest rates and more favorable terms with the credit card banks. This approach is the one most often recommended by the banks themselves, and in the financial press Credit Counseling is touted as the cure-all for debtors who are in over their heads.
So, does this really work? Well, maybe yes, more likely no, depending on your situation. First, you have to understand that the counseling service, while in theory a non-profit organization, actually receives compensation from the bank you owe the money to. So, whose side are they really on – the side of the consumer who’s paying a monthly $20 administrative fee, or the bank that’s paying 7% of the restructured debt? You don’t need to be a genius to figure out that the CCCS program won’t work for a lot of people.
Second, most credit counselors are not going to work all that hard at getting an uncooperative bank to cooperate. The net result is that they simple enter into the typical hardship program that you could have easily negotiated for yourself without the extra fees.
Third, with a CCCS program, the most frequent complaint from ex-participants is that they have little or no insight into what the CCCS agency is doing on their behalf, and they have virtually no control over the process. They send in their single monthly payment, with no idea of how much is going to which creditor, and since most counselors are busy people who work based on high volume, getting a return phone call can be difficult.
Now, not all CCCS organizations do a poor or lackluster job. Like any business, there are good and bad services out there. However, they don’t really SOLVE the problem at all. In other words, if you walk into the office of a credit counselor owing $25,000, you’ll still owe $25,000 when you walk out.
One thing that a counseling agency can do is to GET THE PHONE TO STOP RINGING. This can indeed be a lifesaver, if you are already getting collection calls and the banks are starting to make your life miserable. But in my judgment, credit counseling is a helpful approach only for the consumer who knows that their financial hardship is temporary (say six months or less) and simply does not want to deal with the hassle of handling the phone calls in the meantime. Otherwise, stronger medicine makes more sense.