Is this credit counseling scam worth it?

May 19, 2009 3:45 PM

DebtFilter: I've been paying a credit counseling company (law firm, actually) $60 a month for the past three years to make my minimum payments to the credit card companies I owe. They lowered my annual interest rate to an average of 10% and threaten that if I cancel their service, my interest rates will reset.

Is that true? I owe about $16,000 (as of today) on four different credit cards and my monthly payments are ~$700. I signed up for the credit counseling company because I had panicked about making my payments and needed to take action. It appeared legitimate at the time, but I didn't really do any research before I solicited their services. They have since been charging me, in addition to the initial $600 fee, monthly fees of $60 to transfer money from my account to my credit card companies (I can still make my payments to the banks directly; I've regained all online access to my accounts, etc.). They provide no other service.

If I took out a personal line of credit to consolidate my debts, I'd still pay more than the current 10% APR, so I think I'm getting a decent deal: but I could make the payments myself, on time, and I'd save a good amount of money.

I called a couple of my creditors to ask them if I would get to keep my current low interest rate, but got very evasive answers (one bank couldn't answer, another told me they'd only talk to the lawyer who currently handles my account).

When I called the credit counseling company to ask what would happen if I canceled their services, they became outright threatening, told me that I'd be a pretty difficult process to cancel their service (signing up took a day and an electronic signature!), and told me the interest rates would reset to the credit card defaults (upward of 25% APR, I think).

Do you have any experience with this situation? I finally have enough time to deal with this: what would you advise me to do?

The credit card counseling agency is called Coastal Credit Solutions; the law firm they signed me up for is Laura Hess Kennedy, currently disbarred: they recently lost a class action suit due to debt settlement fraud (I received a whole lot of mail regarding that, but I'm not a client of "debt settlement" services; they just lowered my interest rate but not my debt amounts or minimum payments).

posted by anonymous to work & money (11 comments total)

You might look at this post.

If it were me, I'd look for ways out of this mess (and it does sound like a mess). CCCS would be my first stop to finding a real solution.
posted by Houstonian at 4:12 PM on May 19

You used their service, paid them, and are now calmer and better organized. Inform them, in writing, that you are ending your relationship with them. If they have automatic deduction from your bank account, contact the bank about ending it.

If a credit card company raises your rate, call them and ask them politely to lower it. I did that, and it worked really well. The 60 extra you're paying them will really help you retire your debt faster.
posted by theora55 at 4:18 PM on May 19

Untangling yourself from this company might be a pain, but their threat sounds empty. Why not call your credit card companies and ask if there's any truth to it?
posted by Meg_Murry at 4:41 PM on May 19

Yes, if you are enrolled in a credit counseling plan and stop, your creditors may raise your interest rates again. That doesn't mean you can't get into another credit counseling plan that suits your needs better.

(Is this law firm on Long Island, by any chance? I may have had some dealings with them.)
posted by kindall at 4:56 PM on May 19

(And if for some reason your credit card companies do have a default rate increase when you stop doing business with this other company, they still have the flexibility to lower it back down again.)
posted by Meg_Murry at 4:57 PM on May 19

My back of the napkin calcs estimates an effective interest rate of just over 18% with their $60 fee. If you can get a personal loan for less than that, take it.
posted by hwyengr at 5:16 PM on May 19 [1 favorite has favorites]

There could be some truth to what they're saying about your rate going back up. It's possible that your creditor(s) agreed to a lower rate with the understanding that this organization would improve their chances of receiving payment and therefore making you a lower risk.

Consider a different counseling plan. Visit with a few and see what they can do before jumping ship. Nothing wrong with laying it all out before taking action.
posted by JuiceBoxHero at 5:47 PM on May 19

I contacted a CCCS branch in Connecticut, a few years ago, and actually went as far as getting the paperwork. The fine print does, indeed, say that if you are to cancel, your rates will go back up.

I guess the deal is that legitimate CCCS brances have agreements with almost all of the major credit card companies for them to lower their rates, etc ... but only when the CCCS is paying them. They are, after all, pretty unlikely to take the money and run, so are a lower risk and warrant a lower rate ... unlike, say, you or I.

Terminate your relationship with the CCCS, you lose the collective bargaining power (for lack of a better term) that comes with a relationship with them. The credit card companies may or may not have any real reason to offer you a lower rate. Given the current economic climate, I would wager exactly one penny that they will decline to lower your rate more than a pittance, but I would love to be wrong.

If you're already this far in, you should do really take advantage of that lower interest rate to crank up your payments, and start attacking that principal debt.
posted by jpolchlopek at 6:57 PM on May 19

Having failed to properly read your first post, I see that you are not, in fact, with a real CCCS, but with what looks like a law firm. I apologize for my lack of reading comprehension and will now go soak my head in pickle brine.

I think you should contact a real CCCS in your state and see what your options are. Otherwise, ... umm ... well, another lawyer to handle the first lawyer may not be out of order.
posted by jpolchlopek at 7:01 PM on May 19

You probably need to start by reading this Choosing a Credit Counselor page from the FTC, and Bankrate's Debt Help that Isn't.

Per Bankrate, by the way:
The AICCCA caps enrollment fees for debt-management plans at $75. Monthly service fees are capped at $50. Many member agencies charge fees well below these caps.

Members of the NFCC, whose agencies are mostly known as Consumer Credit Counseling Services, charge an average enrollment fee of $19 and an average monthly service fee of $12 to clients that enroll in debt-management plans.

Now that you've read it, is your counselor an approved, accredited non-profit agency like the CCCS? With fees that high, maybe not. If not you can certainly do better by going across the street with almost no other changes to your approach.

That said, though, look at the totality of your DMP. The DMP is a blanket term that may include legitimate or illegitimate agreements, but in essence, it is a service that the credit industry supports because they get repaid this way. It's an "avoid bankruptcy" siding that they hope a lot of consumers will choose. The basic rule of thumb is whether or not you can repay your debts under a DMP in 60 months or less.

If you can't do it in 60 months -- and likely legitimate creditors won't approve of plans longer than that -- then you are supposed to strongly consider bankruptcy as an option. (Then you have Chapter 7 liquidation or Chapter 13 reorganization as choices, with the law since 2005 intentionally pushing more people into the latter, the "wage-earner" plan. But that's for you and your attorney to work out.)

Your other options are limited. If you have paid down your debt load since you began, and I hope you have, and you haven't taken out any new credit, then you may find your creditors willing to work with you. I wouldn't count on it in normal times, though, and these aren't normal times. They will probably require you to change to a different service from the AICCCA or NFCC so that you remain enrolled in a DMP of some kind.

You could also look for debt settlement offers, as these are more common in the current default-heavy environment. The caution, though, is that the written-off debt will be counted as income on your taxes. Be sure you run the numbers first.

By the way -- CCCS is a trademark. Somebody may call themselves a "credit counselor" or "counseling service", but using all four words "Consumer Credit Counseling Service" together is restricted to those agencies owned by Money Management International, whose subsidiaries are as far as I know all accredited.
posted by dhartung at 10:26 PM on May 19 [1 favorite has favorites]

hwyengr is on the right track. You are paying $720 a year to this company which works out to 4.5% interest on your current balance of $16,000. So your real rate is 14.5%. I assume the $60 rate is fixed so by the time you pay down half your current debt, you will be paying an effective rate of 19% and it just gets worse the farther along you are. This seems like a pretty expensive service. You might look into either an alternate credit counselor now that you have a price to compare, or a consolidation loan taking into consideration the real cost of the counselor.
posted by JackFlash at 10:30 PM on May 19