Credit 101 : Credit Counselors and Debt Consolidators (Page 2 of 3)
This is because the credit card banks will usually accept a lower monthly payment from a customer in a DMP than if the customer were paying the account on their own. Some DMPs advertise that payments can be cut by 50 % although a reduction of 10 to 20 percent is more common.
The second feature of a DMP is a reduction in interest rates charged by creditors. A customer with a defaulted credit card account will often be paying an interest rate approaching 30 percent. Upon joining a DMP, credit card banks sometimes lower the annual percentage rates charged to 5 to 10 percent and a few will eliminate the interest altogether.
This reduction in interest allows the counseling agencies to advertise that their customers will be debt free in periods of three to six years rather than the twenty plus years that it would take to pay off a large amount of debt at high interest rates. That's a very attractive advantage - especially for people who are in debt quite a bit.
A third benefit offered by credit counseling agencies is the process of bringing delinquent accounts current. This is often called "re-aging" or "curing" an account. This usually occurs after making a series of on-time payments through the DMP as a show of good faith and commitment to completion of the program.
For example, a client with an account that has a monthly payment of $50 but that monthly payment has not been paid in two months might be considered by the creditor to be 60 days past due. After joining the DMP and making three consecutive on-time monthly payments, the creditor could "re-age" the account to reflect a current status.
After that, the monthly payment due on the statements would be the monthly payment negotiated by the DMP and the account would be reported as current to the credit bureaus. Now this process does not eliminate the prior delinquencies from the credit reports.
What is does is merely give a fresh start and opportunity for the client to begin building a positive credit history. Like all negative credit information, only the passage of time will lessen the impact of the negative marks when credit scores are calculated.
So how do credit counseling companies make money? They do charge a fee to you for their services, and it is important for you to get all of that information in writing before you sign on the dotted line. However, this fee is not usually enough to make them a huge profit.
The credit counseling companies make most of their compensation from the creditors to whom the debt payments are distributed. This funding relationship has led many to believe that credit counseling agencies are merely a collections wing of the creditors.
This fee income, known as "Fair Share," consists of contributions from the creditors that originally earned the agency 15% of the amount recovered. However, in recent years, Fair Share contributions have dwindled steadily, with contributions of 4-10% being the most common.
There is a lot of criticism, in fact, when it comes to credit counseling agencies and their effectiveness as well as legality. The Federal Trade Commission has filed lawsuits against several credit counseling agencies, and they continue to urge caution to consumers when it comes to choosing a credit counseling agency.
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