debt consolidation business model
Thursday, June 3rd, 2010
What you should know before considering credit counseling or debt consolidation
There is a topic every time I write this subject seems to generate hate mail while at the same time spawning a flurry of wonderful praise from consumers. Of course, e-mail is always the hatred of some people who are owners of these types of "some" of businesses I discussed and those businesses are of course credit counselor companies or debt consolidation, which many "claim" to nonprofit organizations.
You would almost be ostrich with its head stuck in the sand to not see or hear at least one ad per day from a credit counseling or consolidation company debt. However, you can expect this to change and change quickly. As this is a subject that tends to inflame "the owners these companies, I'm taking a different approach by not sharing my opinion, but on the contrary, the opinion of others. I'll start with the news media and the Internal Revenue Service:
"(NPR News, May 15, 2006). The Internal Revenue Service is revoking the status of the exemption tax some of the largest credit counseling agencies in the country. An investigation revealed that the IRS has solicited business ventures serious people in debt and that they do not provide counseling or consumer education, as required.
Driven in part by a Supervisory Committee of Congress and consumer advocates, the IRS began investigating dozens of credit counseling agencies – Most holding status to nonprofits – two years ago. IRS Commissioner Mark Everson says the companies "poisoned an entire sector of the charitable community."
Everson says in many cases, companies were organized merely to funnel business to loosely affiliated for businesses profit. Most companies spend millions of dollars on advertisements that push someone to call the debt to resolve their financial difficulties. And because the tax-exempt organizations are not bound by the federal government does not-call list, the companies were able to randomly call consumers, pitching their services under the guise of a consulting service nonprofit.
IRS Investigations are also likely to affect consumers, thanks to a new bankruptcy law that requires consumers considering bankruptcy to get counseling before they are allowed to drop. The IRS wants to ensure that only legitimate non-profit organizations are on board. In addition to measures announced Monday, the IRS is sending letters to more than 700 compliance for the rest of the credit counseling industry (END). "
Given that almost all credit counseling companies and debt consolidation claim a non-profit status, I think most consumers are easily sucked with skepticism and defense at bay. After all, when most of us hear the word "non-profit" the first thing we usually think a church or homeless shelter.
From the NPR article and the actions of the IRS, I think it is fair to assume that many these "non-profit" organizations have been exploited in a scenario similar to that of a wolf guarding a hen house. However, this does not mean all credit counseling and debt consolidation companies are bad but … you do not need to know the truth about how they operate and their limitations.
The first thing you want to understand is these companies are more interested in making money out of you, they are in preserving your credit rating. The bottom line with credit counseling or debt consolidation is that it absolutely ruins your credit. I can just hear the companies arguing this with a consumer at the moment, telling them nonsense like "It allows your credit since it tells creditors that you are working on your situation and not just fly it. "Listen … if one these places tells you that rather than seeing of. Why? Because they lie to you other things too!
One of the first actions these programs usually requires you do is closed for all your revolving credit accounts. You can then make payments to the organization and they take care of everything for you. What this says to all your creditors (as well as anyone considering giving you credit) is that you are so out of control with your finances that you can not even not pay everyone back to manage yourself. Therefore, you hire someone to do it for you!
99% of the time, these companies claim they can negotiate with your creditors and get interest rates reduced, you save money. This is true, what is also true is that you can easily negotiate these same rates as they may simply asking your creditors yourself. You'd be surprised how many of your creditors would love to hear from you (especially when the chips are down!). Not too mention, money from the company advice was to save you would more than likely be sucked back by the monthly fee (usually around $ 500 to $ 1,000 per year).
This brings us to a dynamic model of any other business. Because these companies always make their money off of monthly fees paid by consumers, the more they can keep the monthly fees coming in the more profitable their business will be. It is for this reason that most consumers who enroll in these companies usually find themselves on payment plans with the lowest monthly payment possible (which also happens to be LONGEST payment plan as well). No wonder it?
Am I against credit counseling companies and debt consolidation? Absolutely not. After all, there are millions of people in America who will never be able to manage their finances. Credit to them is a destructive addiction much like alcohol or drugs and they will never be able to control it. Instead, it will always control them. We've all seen these people. Whenever they are out of credit Shortly after, they are in financial trouble (usually blaming it on an external factor). For these people, I think these programs and credit counseling Debt can be a good thing (like a ruined credit report is not an obstacle for them, but actually an asset). It prevents them from financial problems future by forcing them to live their lives on a "cash and carry" basis, which is ultimately conducive to a better standard of life on the road.
On other side. If you are good with your finances and control with credit but has experienced some type of hardship beyond your control in the past (divorce, job loss, etc.), then the services of these companies will never be for you. You will do much better and preserve your credit rating taking matters into their own hands. This is because you understand your credit score is a powerful tool that can help you move faster, to help others and help yourself and create the life you want. All this boils down to self-management. We all know that those who can not manage themselves eventually be managed by others. Credit is no different. When you learn to manage it well, you are the master and it is servant.
If you care about your credit and want to benefit in the future, then you never rely on a credit or a counseling debt to help you out of any trouble you are in. Instead, you will look inside and get away while preserving Your credit score your best. Credit and debt is for people who are "OK" to throw their credit rating to junk so they can having "someone else" manage their payments for them (because they are unable to manage themselves). And yet, since the negotiating interest rates, you can do as well as or better. If you do not believe me just call one of your creditors and right to tell them your situation. You'll quickly find you do not need to be afraid of them. They just want to get paid like the rest of us.
About the Author
Jay Peters is the founder of Consumer Publishing Group which publishes the Credit Secrets Bible (in print since 1994). To receive Free Credit Tips including “How to Bullet-Proof Yourself From Identity Theft For FREE!” visit their website: www.Credit-Secrets-Bible.net
© Copyright 2007 by Jay Peters