Anyone attempting to repair their credit should be aware of the practices of common credit counseling services and how they may negatively impact personal credit reports.
To be clear, credit counseling services can serve particular value to people that are in need of creditor negotiations in attempt to get out of debt. This is their unique proposition in the marketplace where those in dire financial distress can find an advocate to work with their harassing creditors on a repayment plan, and in most cases, a settlement offer for pennies on the dollar.
However, what most people in desperate need of help fail to ask is, "why" and "how" credit counseling services are accomplishing this debt negotiation on their behalf. Most are just so grateful for anyone taking the creditor heat from them, and showing them a road-map of hope.
However, only after asking those two critically important questions, can you qualify if their services are right for you.
First, "Why" do they offer this service? What is their motivation if they are non-profit?
Generally speaking about the common credit counseling service, they may indeed be "non-profit" in business structure, however this doesn't imply they are in business as a hobby or mere good-will. In fact, one of the ways they are able to structure such good negotiations with creditors and collection agencies is because they partner in "collecting" money that is owed. Collection activities are only so successful, but the remainder of customers that owe money may in fact "turn themselves in" to a credit counseling service in order to set up payment arrangements.
If you think of it at the base level, there is little chance the collection agency is going to get their money from a client that has proven either their inability to pay, or a simple refusal to pay a debt. However, if a credit counseling service now has that same person in front of them asking for payment arrangements, why wouldn't a collection agency or creditor now accept terms to at least recover partial payments? It's sound business decisions.
But we still haven't answered, "why" would the credit counseling service do this? I think you'll find that most of them operate on what "I" call a "finders fee" which is a share in the money paid to the creditor. A sort of "kick-back" if you will. In addition to the "kick-back" payment, most also collect a "donation" from the actual consumer seeking help.
I'll leave the non-profit thought for you to sort out.
Second is "how" do they accomplish this?
We've already explained why the creditor may accept the offer of a payment plan, but we've not talked about how that actually impacts you. In fact, most people are so over-joyed to hear that they can settle for 50% or 60% less than they really owe, or freezing the interest rates during repayment, that they never ask the key question; "are there any side-effects to me?"
Again, speaking for the majority of the services, they will often negotiate a great payment plan, however the creditor then does something that can have long lasting effects on your credit score. 9-10 times, after accepting this negotiation, you'll find a notation on your credit reports under that account that may read:
"On Debt Restructure Plan" or "settled for less than due".
These comments affect your credit reports adversely and bring your credit score down. There are better solutions, but I haven't seen them offered through any credit counseling services, where you can leverage a payment plan direct with a creditor, in exchange for "re-aging" your account on your credit reports, removing all negative information , and replacing it with "pays as agreed".
The leverage is there. They were receiving $ 0 prior to any contact, now for an updated credit report, they will receive their money owed? It's so worth the attempt, but you should be aware of the potential impacts to your credit reports.