The Truth about Credit Counselors
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?
HOW CREDIT COUNSELORS WORK
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, they 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 them for you.
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