Managing Debt

Does Credit Counseling Work? Initiative Reveals Cold Hard Facts

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Over the years, consumers and reporters have asked me many times whether credit counseling “works.” Reporters wonder whether it’s a legitimate solution for those in debt, while debtors want to know, “Will it work for me so I can get out of debt?”

It’s an important question. Credit counseling is often promoted as the best option for consumers who are having trouble managing debt. In fact, the Credit CARD Act requires credit card issuers to publish, on card statements, a toll-free number for consumers to get credit counseling help.

But until recently, data about the success (or failure) rates of credit counseling programs has been hard to come by. When asked, counseling agencies will often point to numbers of consumers they have helped, or talk about the educational services they provide to consumers. Critics, meanwhile, counter that these programs offer far too little relief, only help a fraction of the people who are in over their heads, or even that counselors are really glorified debt collectors.

Now one national counseling agency, Cambridge Credit Counseling, is revealing detailed data about its credit counseling business. Its Transparency Project finally sheds light on whether credit counseling works, and how many consumers it helps.

“This marks the very first time I can think of when a credit counseling agency has embraced disclosing its performance measurements,” says Steve Rhode, founder of GetOutOfDebt.org. Rhode formerly founded and ran a national credit counseling agency. When writing this story, I asked the National Foundation for Credit Counseling whether similar information was available from member agencies, but I was told it was not.

First, some quick background: When consumers contact a credit counseling agency, they are typically offered a counseling session where they share information about their income, expenses and debts. As a result of that consultation, they may be offered a Debt Management Plan (DMP). Debtors who decide to enroll in a DMP will receive concessions from some or all participating creditors, usually in the form of lower interest rates and/or waiver of penalty fees such as late fees. In a DMP, debtors must typically repay 100% of the principal balance owed, plus interest, to participating creditors within 60 months or less.

According to Cambridge Credit Counseling’s Transparency Project’s 2010 results:

  • After a comprehensive credit review, counselors recommended a Debt Management Plan (DMP) to just over one-third (34%) of consumers. Just under one-quarter (23%) of consumers enrolled in a DMP.
  • Of those who enrolled in a DMP, the typical Cambridge client received an interest rate reduction from 21.62% to 7.96%, saving $181.86 in interest charges per month. Payments were reduced by $192.70.
  • In 2010, Cambridge clients who completed their DMP had done so in an average of 41 months.
  • Clients paid an average initial fee of $41.55 and $24.99 per month for the service.  (Fees were waived or reduced for about 27% of clients.) Creditors also paid the agency an average $12.32 per account per payment, in what’s called “Fair Share.”

So now let’s go back to the question, “Does credit counseling work?” Here are the conclusions I drew…

Debtors who enroll in a DMP do, for the most part, get the relief they seek. Most consumers are looking for lower interest rates and payments, and if they enroll in a DMP, they typically get both. That, in addition to the convenience of one monthly payment paid to the agency, makes a difference. In fact, Cambridge’s 2010 Quality Survey indicates that overall client satisfaction was 97.9% for new clients and 96.7% for existing clients.

In addition, clients in DMPs often develop better financial habits. At the 6-month mark, 75.9% of Cambridge Credit Counseling clients said they had reviewed or revised their budgets, 62.4% were tracking expenses, and 27.7% were building savings.

The majority of debtors who contact a credit counseling agency will not be helped. Despite those positive numbers, just under one-quarter of consumers who contacted this credit counseling agency enrolled in a Debt Management Plan, the key product offered. To be fair, Christopher Viale, the president and CEO of Cambridge Credit Counseling Corp., estimated that roughly 20% of consumers who contact his organization “can manage their debt on their own, they just need some fine-tuning of their budget.” He also pointed out that some debtors who don’t enroll in a DMP when it is first proposed “come back later when they realize they can’t do it alone.”

Not all clients who enroll in a DMP complete it, either. Some drop out for positive reasons (such as getting back on track, or paying off their remaining debt more quickly), while others drop out for negative reasons (because they can’t keep up with their payments, or to file for bankruptcy, for example). Cambridge reported losing 16.7% of its DMP client base in 2010.

What’s Next?

Other counseling agencies should be required to reveal these kinds of numbers. If creditors are going to be required to refer consumers to these agencies under federal law, there is no reason they shouldn’t be required to make this kind of information public. While I suspect the numbers Cambridge Credit Counseling has disclosed are be similar to those of other reputable national counseling agencies, it is critical that regulators, policymakers and consumers have access to this type of data.

Secondly, legislators need to take a serious look at whether enough is being done to assist consumers who want to pay back their debt and avoid bankruptcy. Bankruptcy laws were tightened in 2005 (before the economic meltdown), making it more difficult to file for bankruptcy. Viale estimates that about 30% can’t afford the payments proposed under a DMP. If that’s correct, legislators need to take a hard look at whether more consumers could participate in DMPs if creditors offered better concessions, including reductions of interest to 0% and/or less-than-full-balance payment programs.

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  • http://www.debteye.com Kevin Yu @ Debt Eye

    The credit counseling agencies need to become more transparent with their success rates!

  • http://www.singlemomfinancialhelp.com/credit-counseling/ Celine

    I think that there are still so much things that credit counselers need to be more flexable with!

    • nitro

      Remember the info you give the credit coucilors can be used against you if it is released to the banksters for their court case.

  • http://TheBudgeteer.Com TheBudgeteer

    A structured debt management plan can reduce interest rates on high interest credit card debt.

  • ddw

    After over 45 years in the Credit Industry . I “do not” , advise credit counseling. With a bit of research, consumers can do exactly what these agencies do. It requires several phone calls to Creditors, and in a nice way ask them their best solution re: interest reduction as well as payment reduction. Yes, it takes work, budgeting, and a commitment to lower indebtedness, or better yet to eliminate most of it.
    Most creditors are willing to assist in this “self help” scenario. It is to their benefit.

  • Sean

    The key is to find the right company. Make sure they are non-profit.
    I was able to cut down the rate of interest on my debt in half from 11% to about 5 or 6 %. I only have about $1500 of debt ($10,000 to start with) to pay off.
    The worst thing you can do is nothing and just pay the minimum every month. It is designed to keep you in the credit card company’s pocket and one late payment could increase your APR up to high 20%’s

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  • alan franklin

    Chris Viale is 100% correct in alluding to the fact “No One Cares” from the regulator view point. The Credit Counseling Industry is in a perfect storm moment. What do I mean by that? The Credit Counseling 501(C)3 Agencies are ALL regulated by the State Banks, one at a time. On the other hand the Comptroller Of The Currency regulates ALL the Credit Card Issuers(Banks). The Credit Counseling Agencies receive “donations” from the Credit Card Issuers who have reduced their contributions from 15% to as little as 2%! Agencies have virtually no leverage requesting a better deal for consumers that need help, because the Creditors control that and fully understand that if the Comptroller Of The Currency also regulated the Credit Counseling Agencies things would be a lot more straight forward because the regulator would have a direct interest in outcome. The DMP was for a long time the nemesis for Bankruptcy, Filing occurs unnecessarily when the Debtor tries to repay through Credit Counseling, but does not get enough benefit in the DMP, and instead ends up filing under Chapter 7. One last thing, the C Of C completely understands they could improve things greatly, enter the politics of each State, and the fact they derive enormous fees from the Credit Counseling Agencies while the Debtors suffer.

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