Wolf in Sheep's Clothing

I had an interesting conversation today with a gentleman from a credit counseling company. I saw the listing in the local phone book and decided to explore what services they offered. The company was listed under Credit and Debt Counseling Services. A very friendly gentleman answered the call on the 800 number. He indicated that they provided budget counseling, education, and a debt management program. It's all done by phone and fax. They have 1100 clients nationwide. They do not have any classes. They are a non-profit organization. They only handle unsecured debt. They will not help you with your mortgage payment or any other type of secured debt.

When pressed as to fees for service I was told there was a $75 set up fee that would be a tax deductible donation to the non-profit organization. Then there would be a set fee of $25 to $50 per month depending on the number of debt accounts they managed for me. This fee, and the amount of money needed to cover the actual monthly debt payments, would be electronically debited from my checking account each month. He emphasized that the fee was tax deductible.

I questioned how payment for a service could be tax deductible. I did not get a clear answer. "All I know is that it is tax deductible." I stated that if I went to the Mental Health Center (also a non-profit) and received a service, my payment would not be tax deductible. He responded that he did not write the laws, he just knew it was tax deductible.

I have two major concerns about this type of "credit counseling service." First, I think they are trying to hide their fees under the category of tax deductible donations and therefore cheating Joe taxpayer and Uncle Sam. Secondly, I do not believe they put much energy into teaching their clients the skills needed to handle their own finances and debt payments. They are not about empowering people to learn to do for themselves, or turning bad financial habits into good financial habits. I do believe they are about making money.

If they empower their clients to properly manage their own accounts then the debt management program, as it exists, would not be needed. There would be no collection of the monthly "tax deductible donation" for the 3 to 5 years required to payoff the debts. Do the math, that is a lot of donation. A mid-range fee of $35 for 5 years is $2100. At 1100 clients that adds up to be $2,320,000 in tax deductible donations ($464,000 annually). This is just an estimate as there is a fee range and all accounts do not continue for 5 years. However, I think I am in the wrong type of debt reduction business!

As a consumer, I would rather make arrangements myself for the automatic debt payments to go directly to the creditors, negotiate my own lowered interest rates, and then automatically deposit the $35 per month into my own tax deferred retirement account. I would much prefer the fee amount go toward building my retirement nest egg.

On the flip side, if you are late with a credit card payment, just once, they will hit you with a high interest rate, as high as 29% and a late fee as high as $39. It would be worth it to pay the credit counseling service their tax deductible donation if you are unable to arrange automatic payment for your revolving credit accounts to ensure you are never late with a payment. However, I would feel much more comfortable dealing with a company that was up front and honest about their fees.

Automatic bill pay is becoming an everyday occurrence. Most utilities and credit card companies have automatic payment options available from their websites. In my opinion, only if you are unable to automate your own debt payments should you consider one of these agencies. Even then, do your homework to make sure you are dealing with a reputable company.