Consumer credit counselling is not counselling at all in the sense used across the rest of this site, but if you’ve arrived here looking for information about credit counselling, this page is designed to help with a brief overview of the area.
BIG BOLD DISCLAIMER!
Please note that this site does not offer any type of financial advice, including credit advice or debt consolidation advice. This page merely explains some of the background of ‘credit counselling’, and the only ‘advice’ (if you can call it that) appears at the bottom of the page: namely, I urge utmost caution when considering financial services of this type, and I suggest that prospective clients of companies offering these services should expect to be treated respectfully as potentially very valuable customers.
Is ‘Credit Counselling’ Counselling?
In the sense used by the rest of this site, where ‘counselling’ refers to a helping relationship between equals, a relationship characterized by openness, honesty, and empathy, so-called consumer credit counselling or debt counselling is not really counselling at all. More often than not, in the opinion of this site, credit counselling is an exploitative and highly lucrative relationship in which the ‘credit counsellor’ works for the benefit of creditors (those who have lent money) to ensure that debtors (those who owe money) can continue making interest payments to the creditors, preferably (from the creditors’ point of view) for as long as possible.
How Problems Start: The Dangers of Compounding Interest
From the standpoint of the debtor, the risk of not keeping up interest payments is severe: when interest payments are not made sufficiently quickly, new interest is charged on both the original principal of the loan and the unpaid interest. This is called compounding: interest upon interest upon interest. If left unchecked, compounding quite literally grows debt forever. It is exactly the same idea as getting bank interest on top of your bank interest in your own savings account, except it is working in reverse. For a creditor, compounding is wonderful. For a debtor, it can be a financial disaster, impacting financial freedom for years and years.
It is worst in the case of unsecured debt such as credit card debt or other revolving debt (as distinct from secured debt, such as home loans and car loans), for one simple reason: the interest rate is higher. (The interest rate is higher because the creditor demands a higher rate to offset the risk of loaning money without some collateral to claim in case the creditor defaults.) And every single time that higher interest rate is applied, the compounding makes the problem worse.
Why Just Keeping Up With Interest is Not the Only (or the Best) Answer
Just keeping up with interest payments — the goal for which most credit counsellors are aiming — only prolongs the agony. It allows the creditor to extract the maximum amount of money from the debtor without compromising the sustainability of the business relationship by risking having the debt grow out of control. Generally speaking, creditors do not want debtors to pay off their debts early (because that means less interest!); rather, they want them to pay them off on exactly the originally agreed schedule, a schedule which will have been set based upon the creditor’s best estimates of acceptable risk and return.
Why Consolidate and Eliminate Debt?
A better solution, where possible, is to consolidate and eliminate the principal amount of the loan as quickly as possible — i.e., to shorten the life of the loan and thereby pay back less in overall interest fees. This is what most credit counsellors do not help debtors with, but it is what some debt consolidation specialists do help with (albeit for a hefty fee).
Resources and Recommendations for Overcoming Debt
In the United States, the Federal Trade Commission and individual states’ Attorneys General are responsible for overseeing this area of finance. The FTC can advise on consumers’ rights under the Fair Debt Collection Practices Act, and perhaps the first important step to take should you encounter debt difficulties is to make sure you know your rights under the Act.
I would urge utmost caution in considering the services of any type of credit counsellor or even debt consolidator, but reputable firms do exist which can be a great help to individuals at risk of serious financial difficulties due to debt. Their aim should not be to keep you coughing up interest payments month after month; rather, it should be to help you erase the principal of the loan as quickly as possible.
Remember: if you are considering the services of any such firm, you will actually be viewed as a very valuable potential customer, so you can expect to be treated that way. If someone offering help in this area does not treat you respectfully and as a very valuable customer, I would urge you to look elsewhere!