The
Truth about Credit
Counseling
Jeanette Fisher
How Can Credit Counseling
Be Free?
The consumer credit counseling
business is a huge industry in America, since the
average American is a mere three paychecks away from
facing huge, potentially devastating financial
difficulty. Each year, more than a million Americans
turn to credit counselors to try to help themselves
regain control of their financial burdens. But just
how the credit counseling business works is a
mystery to most consumers. What's involved when you
hire a credit counselor?
It may come as a bit of a shock, but the first thing
you need to understand is that consumer credit
counselors don't work for YOU! That's one reason
their ads on television, radio, and in your email
box shout, "Our services cost you nothing!" However,
any business needs to derive income from somewhere,
so if they're not charging you, who does pay them?
In truth, credit counselors
work for the lenders. Here's how it works:
Regardless of what their
commercials would have you believe, credit
counselors don't renegotiate the overall amount of
your debt--that is, the total principal balance you
owe to your creditors. Instead, they negotiate with
the various lenders to decrease your interest rates.
For instance, let's say that you're paying somewhere
around 18 percent on the charge card you want help
with (some stores still charge as much as 21
percent). A credit counselor will contact the
cardholder and negotiate a lower interest
rate--sometimes as much as half the original rate.
That's the good news. The not-so-good news is that
your minimum payments will still be based on a 90/10
split, meaning that 90 percent of your monthly
payment will still go toward paying interest on the
card. That means, as is the case with any credit
card payment, it will be well worth your while to
pay a little more than the minimum each month, in
order to whittle down your principal. It will save
you significant amounts of money in the long run.
But how can credit card companies
continue to make money by cutting interest rates in
half, and what do they have to gain by doing so?
The first reason is because they know that it's
better to get something, which they'll do if you
continue to pay them, even at a reduced interest
rate, than to risk having you default on the entire
amount. The second reason is because, even at the
reduced rate, the lender is still making a healthy
profit. They have borrowed that money at a
significantly lower rate--sometimes as much as 66
percent less than the rate they'll be charging you.
(That’s why the financial institutions have big
buildings; they make huge amounts of profit.)
Credit counselors CAN save you money, there's no
doubt about that. But don't be fooled into thinking
that they work for YOU, because they don't. In the
end, credit card companies love credit counselors,
because the counselors truly work for them. That’s
why you don't pay for credit counseling services.
The credit card companies are happy to pay the
credit counselors for you.
Copyright © Jeanette J. Fisher.
Jeanette
Fisher teaches how to get out from under credit card debt,
how to use credit to make money, and six ways to
build strong credit to finance your first home and
multiple investment properties. For a free credit
advice and free ebook "Credit Tips for Mortgage
Financing," see
Worry-Free Credit Information:
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