Credit counseling is thought of as a non-profit service delivered by IRS 501(c)(3) non-profit organizations.
But modern credit counseling was born out of the intersection of problematic for-profit “debt poolers” and community-based budget counseling first started by local creditor groups.
Back in the 1930s and 1940s as more for-profit companies were being closed down as taking advantage of disadvantaged consumers non-profit groups who had been offering advice and help to stay current on bills.
Consumer Credit Counseling originally started as Economy Budget Service. It was then the brainchild of the late Leon J. Ingram, president of the Capital Finance Corp., a public-spirited 18 state, small loan company which financed and operate it entirely alone at a $15,000 annual cost for 12 years. On August 1, 1967, it was taken over as a community sponsored project. (Social service outlook, Volumes 3-4, New York (State). Dept. of Social Services, New York (State). Dept. of Social Welfare) – Source
Much has changed over the years but one thing remains the same, credit counseling is still very tied to creditors for funding and participation in their efforts.
Today the range of services has expanded beyond budget help and has expanded into student loan repayment advice and housing counseling as major product efforts.
The primary product sold by credit counselors is the Debt Management Plan (DMP) that consists of about 60 monthly payments.
This is a program where the credit counselor collects one payment from the consumer each month and cuts it up into smaller payments which goes to the appropriate creditors.
Credit counselors earn an income from this program by keeping a percentage of the payment while the consumer gets credit for the full amount. Or the credit counselor may invoice the creditor for their “fairshare” of the collected payment.
A more modern creditor funding solution has been to untie funding from the collection of the payment and award the credit counseling group some arbitrary funding instead.
Non-profit credit counseling groups can provide budget advice and check the budgets of consumers facing financial pressure to provide suggestions.
They can also offer some advantages in a DMP where some creditors will reduce or drop the interest rate they are charging on the debt repaid through a credit counseling program.
The single monthly payment made by the consumer to the credit counseling group provides a benefit through simplifying making payments during a difficult time.
Many non-profit credit counseling group employees are good people who want to be helpful.
Credit counselors tend to not provide balanced advice and think poorly about solutions like debt settlement and bankruptcy. That bias seems to often disregard other solutions that might be more appropriate.
To see what other solutions are available look at the Get Out of Debt Calculator.
I have found this steering of consumers occurs not because credit counseling staff are mean or deceptive but because they believe in what they are doing to such an extent and trying to bring in business that they develop a subconscious bias against solutions they don’t offer.
I’m very concerned about consumers entering DMPs to repay their debt and forgoing solutions that would help them build emergency savings accounts and retirement savings faster.
To see how much future wealth may vanishes repaying debt with a DMP, use this calculator.
While credit counseling groups are critical and speak about other debt solutions they are silent when it comes to the effectiveness and success rates of the DMP.