The National Foundation for Credit Counseling sent out a press release today claiming their survey uncovered public misconceptions about credit counseling agencies.
The press release listed five areas the NFCC felt consumers struggled with in knowing the truth about credit counseling.
But some of the points the NFCC felt they needed to clarify appear to actually misrepresent the truth to consumers.
Of concern were the statements:
NFCC: Many thought credit counseling cost too much.
The NFCC Answer was, “The truth is that counseling through an NFCC Member Agency is either free or low cost. One of the NFCC’s Member Quality Standards is that no service can be denied based on an inability to pay. Therefore, in cases of true hardship, the fee will be waived.”
The truth is that agencies can charge up to $50 per month for participation in the credit counseling program. Over a five year period that can add up to $3,000. That’s neither free nor low cost.
As far as I am aware, the NFCC has not released any statistics that state the actual cost of consumers for participating in agency debt management plan programs. Despite previous requests they have also not released any audited member agency statistics to even clarify what the percentage of success is in eliminating debt through their debt management program.
NFCC: Others felt that credit counseling agencies only offered advice, not real solutions.
The NFCC answers was, “The goal of the counselor is to provide both short-term and long-term solutions for consumers. Each person is provided with a written Action Plan which provides concrete steps that address immediate concerns and lay the groundwork for a financially stable tomorrow. The Debt Management Plan is an example of one solution that may be offered. When utilizing this tool, the counselor negotiates with the creditor for a lower monthly payment, a lower interest rate, and late fees and over-limit fees stopped or lowered. Once in place, the DMP provides immediate relief for those struggling to meet debt obligations.”
The truth is NFCC agencies offer a limited set of resources to help people to get out of debt. Member agencies generally do not offer any debt settlement solutions when appropriate nor do they regularly offer help with unsecured debt consolidation loans when that makes sense. They also talk down consumer bankruptcy although it is often the best method of rapid intervention.
Then there is the statement that “the counselor negotiates with the creditor” which appears to be nothing more than a false statement. Debt management plan payments are primarily dictated by the creditor and not “negotiated.” I’m sure they know that.
NFCC: Some thought that debt settlement or bankruptcy were better or easier options.
The NFCC answer was, “Debt settlement and bankruptcy are both serious financial decisions, and typically have negative consequences for a person’s credit report and score. They may be the right answer for some situations, but should only be considered after having first reviewed all other resolution options.”
I do agree that all debt options need to be evaluated and provide an online calculator to fairly evaluate such options. But the NFCC statement appears to be more fear and scare than factual.
Besides, wouldn’t the reciprocal of their statement be true that credit counseling “should only be considered after having first reviewed all other resolution options?”
Credit counseling is also a serious financial decision and can lead to the loss of millions in retirement if enrolled into blindly. See The Hidden Real Cost of Credit Counseling and Debt Settlement.
Additionally, the statements about bankruptcy in particular are disturbing. In most cases bankruptcy can discharge debt in about 90 days, cost less than $2,000, and is nearly 100% successful.
Some consumers even increase their credit by filing bankruptcy and great credit can be rebuilt following bankruptcy within a year or two. Credit counseling repayment plans are estimated to take five years and while nearly all debt is discharged with a chapter 7 bankruptcy, credit counseling programs are only successful part of the time, and less than half the time at that.
“Many don’t succeed. The dropout rate for those who enroll in credit counseling debt management plans is 45%, according to the National Foundation for Credit Counseling.” – Source
As far as I’m aware the only credit counseling agency that releases performance data is actually not an NFCC member agency. Cambridge Credit Counseling has regularly released performance data, which you can find here.
NFCC: Some believed credit counseling would hurt their credit report and credit score.
The NFCC says, “NFCC Member Agencies do not report to the credit bureaus. Actually, many clients’ credit scores improve after credit counseling or by utilizing a Debt Management Program (DMP), as payments become consistent and debt decreases. As an example, the NFCC’s 2012 Clients of the Year recently paid off their house and bought their first new car.”
But the truth is more than a shade different.
While credit counseling agencies don’t report to the credit bureaus, the credit cards included in the credit counseling program are closed by the creditor and that is reported to the credit bureaus by the creditors.
Those entering credit counseling also do take a hit and it does impact the credit score. See Why Enrolling in a Credit Counseling Program Can Hurt Your Credit Score.
Again with the client of the year.
NFCC keeps trotting out their 2012 client of the year as proof of great things. “As an example, the NFCC’s 2012 Clients of the Year recently paid off their house and bought their first new car.”
But what they don’t say is that the 2012 client of the year is a poor example of making smart financial decisions. I’m not the only one who has been critical of that situation. See the MSN Money story by Liz Weston, Rising debt weighs down seniors.
So Why the Need to Misrepresent the Truth?
What is so entirely perplexing to me is that credit counseling and probably the NFCC wants to be seen as a trusted place consumers can turn for good advice, so why not just tell people the truth?
Let’s be honest here, the press release, which you can read here, appears to be more of a sales tool than a balanced educational statement that puts consumers first.
I’d have to stand behind the motto the NFCC displays, “Knowing the difference can make the difference.” It sure can.
If you really want to know the truth about credit counseling, you might want to read Consumer Credit Counseling Pros and Cons. My Ultimate Guide to Understanding How Credit Counseling Really Works.