Youth and Money
Credit Bound
Three years ago, things couldn't have looked bleaker for
Barb Smith. The single mom, now 49, was trying to make house payments and raise
her teenage son, Nathan, while carrying $20,000 in credit card balances.
She wasn't spending frivolously, she said ó no stereo systems, no shopping sprees
ó but was relying on her seven credit cards to pay for home repairs and new tires.
At her wit's end, she turned to a credit counseling service called Freedom Financial
Consultants and got on a debt management plan. The company negotiated with her creditors
and lowered her interest rates, in some cases to/s0 percent. Today, her debt is
down to about $2,700, Smith said.
"I hope to see ó by the end of next year ó that I'll have a savings account," she
said.
Everyone, it seems, wants to rescue consumers from credit card debt these days.
Credit counseling agencies advertise on television, in newspapers and magazines
and online. Most claim to be nonprofit. But
if they're not out to turn a profit,
why are they spending thousands "or in some cases, millions" to help people get
out of debt?
Companies may appear to be legitimate and have good motives. Still, just because
the companies claim to be nonprofit doesn't mean they don't make a lot of money.
Hard times
These are hard times for America's oldest counseling agencies. Traditionally, nonprofits
using the name Consumer Credit Counseling Service, such as CCCS of Greater Atlanta,
dominated the industry. They typically got money from the United Way and from creditors,
like the credit card companies.
The CCCS firms are part of a national trade group called the National Foundation
for Credit Counseling.
Ten years ago, foundation members had at least 50 percent of the credit counseling
market; today, it's only 25 percent, said Ed Rawa, president of Consumer Credit
Counseling Service of Central Florida, based in Orlando.
What happened? Competition. As consumers' debt boomed (Americans' revolving debt
load was more than $680 billion last year), rival agencies started popping up everywhere.
There are now at least 1,200 credit counseling agencies in the United States, said
Howard Dvorkin, president of Consolidated Credit Counseling Services, a Fort Lauderdale,
Fla.-based company that is one of America's biggest credit counseling agencies.
It is a rival of Consumer Credit Counseling Service.
Of his competition, Rawa said, "They spring up because, in this country, anybody
can do good. The fact that they are nonprofit means no one is investing in them
as stockholders."
The way counseling agencies operate also has changed. For example, CCCS has traditionally
counseled people in person in its various offices. A CCCS counselor would review
a debtor's budget and financial condition, then often put the person on a debt management
plan, negotiating with creditors to lower monthly payments or interest rates. The
typical customer has eight credit cards and about $15,000 in unsecured debt, Rawa
said.
But, the "new breed" of counseling services do almost all of their counseling by
telephone.
Travis Plunkett is the legislative director for the Consumer Federation of America,
a Washington, D.C., lobbyist group. He said the trend is toward "debt management
mills," agencies that listen to consumers for 10 minutes over the phone and put
them on a debt management plan.
The trick is volume, getting people on a plan as quickly as possible, Plunkett said.
Rawa said his agency is having to do more and more telephone counseling. When a
debtor makes an appointment with CCCS, there's a 40 percent chance he will cancel
or won't show up. The cost of maintaining offices is catching up with Consumer Credit
Counseling, he said.
"There's nothing wrong with telephone counseling we do some of it," Rawa said. "But
that's about 15 to 20 percent of our business."
Dvorkin said his firm does some face-to-face counseling, but his clients' no-show
rate is 50 percent. So the majority are counseled by phone. Some counselors can
whip through a telephone session with a client, but others take their time, he said.
His first move when counseling a client is to listen to the person's story, go over
his budget and suggest a manageable way to pay off creditors.
