Credit Counseling Payments Too High? Try Again!

If you looked into credit counseling earlier this year but found the monthly payments too high, you may want to try again. As part of an initiative spearheaded by the National Foundation for Credit Counseling (NFCC) to help more people pay their debts through a credit counseling agency and avoid bankruptcy, the top ten credit card issuers have agreed to offer new reduced payment programs.

How much better are these new repayment plans? In some cases, a lot better. Take someone who has $24,000 in credit card debt (the average amount that people owe when they contact an NFCC member agency). Under the traditional Debt Management Plan (DMP) offered by counseling agencies, the payment could be $750 a month. If this individual can afford that, terrific. But if the consumer cannot afford it, (s)he would be left with no other options but to consider debt settlement or bankruptcy. Under the new DMPs, however, that same consumer could have a monthly payment as low as $420 – a savings of $300 per month.

These new and improved DMPs are called “Standard” DMPs and “Hardship” DMPs (together dubbed the “Call to Action” DMPs). Here’s what they offer:

1.    Lower monthly payments. Monthly payments can be as low as 1.75 percent or 2 percent of the outstanding balance. Previously, monthly payments totaling at least 3 percent of the balance were required. All plans must be structured so the consumer is out of debt in five years.
2.    Monthly savings accounts. Though not a requirement, consumers will be strongly encouraged to set aside $25 a month in a savings account for emergencies.
3.    Budgeting cushion. In the past, many creditors wanted to see every possible penny in the debtor’s budget go toward repaying what they owe. It’s not hard to see how that would be recipe for failure. Now consumers will be allowed a “cushion” of $200 in their monthly budget for the unexpected and unplanned.

With these changes, more people should be able to stick with a plan to get out of debt. It’s not easy these days. According to Moody's Credit Card Index, credit card charge-offs (bad debt) climbed in March 2009 to a record high 9.30 percent, and are expected to peak in the second quarter of 2010 at about 12 percent. That’s an astounding number of unpaid bills, and it will only make the credit crunch worse as banks try to make up for rising losses by charging higher rates and fees to everyone else.

Of the 3.2 million consumers who contacted NFCC member agencies for help in 2008, some 450,000 who couldn’t qualify for help probably would have qualified under these new guidelines.

So if you’ve called a credit counseling agency this year and found out you just couldn’t afford to enroll, it may be worth a second look. And if you are on the fence, wondering what to do about those mounting credit card bills, take another look at credit counseling. It may offer the relief you’re looking for.

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com. Gerri contributes budgeting, debt recovery, and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis