By Kenneth Long on September 25, 2011

Credit counseling and debt management industries may be more needed now than ever. There is no dispute that Americans are overextended and so far in debt that many risk financial failure. So why is credit counseling becoming obsolete?

It is no secret that we as Americans would rather someone fix our situation for us rather than to have to learn how to do it ourselves. Yet even the debt management program is rarely sought after now that regulatory changes and credit card company policies have changed. Here is why.

Credit Card Companies Forced to Behave

The Credit CARD Act of 2009 prohibits credit card companies from some of the abusive practices that were so harmful to cardholders who were experiencing certain financial difficulties. Most notably, credit card companies may no longer increase your interest rate at any time for any reason.

Instead, a customer must fall 60 days delinquent before a penalty interest rate can be assessed. Many cardholders complained that a temporary lapse such as a forgotten payment resulted in a late fee followed by hundreds or thousands of dollars in extra finance charges. Often the higher minimum payments that resulted were just out of reach for families living paycheck-to-paycheck, resulting in additional missed payments.

These families frequently sought credit counseling in order to learn how to get their credit accounts back under their control. Many were able to benefit through debt management programs which helped them repay their debt under more favorable terms and restore their credit ratings.

The new law prohibits these interest rate increases and limits late fees as well. As a result, cardholders rarely seek credit counseling until they are already at least 2 months delinquent.

To further limit their opportunity to benefit from credit counseling, cardholders typically lose the right to gain benefits on an account once they fall 180 days delinquent. Therefore, there are now a maximum of 120 calendar days that a cardholder who needs help from accelerated deficiency from actually being able to reasonably benefit from a debt management program. This more narrow window further reduces the suitability of the debt management program from a much wider percentage of prospective clients.

Credit Card Companies Offering Long-Term Hardship Benefits With Zero Counseling Requirements

In previous decades, credit card companies would be unwilling to reduce interest rates and shrink minimum payments for cardholders in distress unless they agreed to complete budget counseling. Furthermore, they would be required to give up all of their credit cards as a condition for gaining benefits.

Credit card companies would occasionally grant temporary hardships of no longer than 6 months for cardholders who incurred a bona fide hardship that they reasonably expected to be cured within just a few months. Beginning in 2009, credit card companies began approving long-term hardship benefits to cardholders of 12 months duration. Furthermore, these hardship benefits could be extended if they were still needed. Some card companies provided 5 year plans featuring low interest rates and reduced minimum payments. No budget counseling is required for any of these plans.

This undermining of credit counseling organizations makes such educational programs obsolete. As a result, most credit counseling organizations are experiencing rapid reductions in their counseling sessions and program enrollments. Enrollments are down more than 60% at some agencies.

Creditor support for credit counseling programs has been waning for many years, with support payments dropping from an industry standard 15% of payments to around 4-5%. Many creditors reduced benefits available through credit counseling in the mid-2000s in search of increased profits. Support is still lacking in many regards. Lowes, Home Depot and Dell Financial Services are three creditors that continue to supply zero benefits through credit counseling. American Express has not approved a new credit counseling program in over 2 years.

The lack of support for credit counseling programs is disturbing, since financial literacy among Americans is much of the reason why the economy continues to struggle. Yet, credit card companies by and large have taken steps to remove credit counseling from the process of helping cardholders repay their debt.

How are Credit Counseling Organizations Adapting?

Some credit counseling organizations are shutting their doors. Others are merging with larger organizations in hopes that some staff jobs might be retained.

Credit counseling organizations have also sought to move into other fields of supporting financial literacy. Agencies like Vision Credit Education of Raleigh, NC have been providing free income tax preparation through the IRS VITA program for several years as a means for branching out into other sources of community support. Their housing counseling programs have provided prospective home buyers a way to evaluate their creditworthiness and financial readiness for home ownership.

Bankruptcy counseling used to be a viable component of credit counseling. However, actual educational programs are being skipped over in favor of cheap online bankruptcy counseling courses that allow debtors to breeze through the counseling requirement and receive their counseling certificate.

Dependence on grant funding can be risky, since it is often temporary in nature. Yet for many credit counseling organizations, it may be necessary to keep their doors open.

The number of credit counseling organizations is indeed shrinking. Many organizations are evaluating the high cost of maintaining ISO accreditation as well as state bonding and licensing requirements as a condition for continuing to offer debt management programs. From a financial standpoint, it makes little sense for charities to remain in the credit counseling industry, since the costs are now higher than the revenues. It is now taking away from their other educational programming.

Having worked in various capacities within the credit counseling industry for over 10 years, it is difficult for me to watch the slow demise of such a vital aspect of consumer credit. The decline of credit counseling is unmistakable. The organizations that focus on consumer education are dropping out of the mix at a rapid pace. Debt management companies and other for-profit corporations are picking up market share, but even those commercial operations are struggling with the challenges of the debt relief industries.

How this shakes out is anyone's guess. Either way, educational credit counseling as we know it is on its way out in favor of the efficient commercial debt management operations that don't waste time on consumer education.

The only hope for the industry is for credit card institutions to return to the standards of requiring their cardholders to receive credit counseling as a requirement for receiving needs-based benefits. Otherwise, their long-term hardship programs are just another bailout for irresponsible consumer behavior.

By Kenneth Long on September 11, 2011

Minnesota's Lori Swanson is taking on internet payday loan companies for charging usurious interest rates. Many of these companies thwart states' payday loan laws by originating such loans from overseas. If you take out one of these loans, you just may be dealing with employees of an unlicensed company in India.

Lawsuits from Minnesota's attorney general have been filed against Integrity Advance and Sure Advance LLC. The payday lenders are Delaware corporations that offer online payday loans to consumers across the country.

Three other lenders are based out of Utah. Flobridge Group LLC, Silver Leaf Management and Upfront Payday have also been sued by Swanson's office. Flobridge Group was already recovering from legal action from the attorney general in Idaho.

Minnesota's investigation revealed that one customer started the form but never completed the loan application. Still, the customer's mother was contacted just 2 days later with a demand for $6,000 to cover a $700 loan. While caller ID provided a Minnesota area code, the Swanson's office found the calls originated from India.

Minnesota state law allows for a maximum 33% interest rate plus a $25 administrative fee for any loan exceeding $350 and up to $1,000. Loans in this investigation were as high as 782% APR.

What is worse than the high interest charged by these lenders are the abuses committed by their overseas staff. By offshoring operations, online payday lenders can somewhat insulate themselves from the FDCPA lawsuits that are often a debtors online line of defense against abusive payday lenders.

This should serve as a wakeup call to any desperate debtor who considers taking on a payday loan. In many cases, applications are originated from states in which payday loans are illegal. Even if payday lending is legal in your state, online payday loan companies are often not licensed to provide payday loans in your state.

If you are considering a payday loan, you should instead contact your bank or credit union. There may be alternative short-term loans that carry much lower interest rates than any payday lender would ever consider. If you do choose to open an account with an online payday lender, you may be opening up your life to more than just high debt. You could also find yourself a victim of identity theft.