Consumer Credit Counseling Industry under IRS Scrutiny

The Internal Revenue Service (IRS) is launching a widespread “crack-down” on the non-profit status of Consumer Credit Counseling Agencies operating as so-called charitable organizations. According to the IRS Credit Counseling Compliance Project report, dated May 15, 2006, the IRS has uncovered abuses by a large percentage of credit counseling organizations including: failure to provide education, operating as commercial businesses, and serving the private interests of directors, officers and related entities instead of the best interests of the consumers they are supposed to represent.

Per the report, the IRS examined the nonprofit 501(c)(3) tax-exempt status in 63 cases that represent 56% of the credit counseling industry revenues. Of those cases, 9 have had their non-profit status revoked or terminated and 32 have received proposed revocations. This represents 41% of the industry revenues. In addition, 110 applications for non-profit status were evaluated, of which, only 3 were approved. Further audits of nonprofit credit counseling agencies by the IRS are ongoing.

According to Robert Manning, Director of the Center for Consumer Financial Services, the IRS findings conclude that CCCs are essentially debt collectors, not charities. This conclusion is based on the fact that CCCs obtain the bulk of their funding from the creditors and the fact that the creditors benefit from the results of the debt management plans (DMPs) managed by the CCCs.

Congress has conducted their own review of the credit counseling industry over concerns of abuse and complaints from the collection agency industry that the tax-exempt status of CCCs gives them an unfair advantage. The results of Congress’s investigation concluded that while some agencies are ethical, others charge excessive fees and provide poor service to consumers.
These findings support what I have stated in my previous blogs: Consumer Credit Counseling Agencies essentially act as debt collectors, working for the creditors, not you, the consumer. Their non-profit, tax-exempt status benefits them, not you. CCC is not free.

In summary, if you are experiencing financial difficulties and considering credit counseling, you need to give serious consideration to the implications of these findings. With no significant for-profit credit counseling agencies in existence, it is difficult to predict what will happen to the industry as a result of this crackdown. At a minimum, there will certainly be a number of agencies that will shut down and many that will have to undergo a reorganization in order to maintain their status or to convert to a for-profit entity. This shakeup will most likely impact consumers enrolled in what is typically a 5 to 7 year program. Faced with losing their tax-exempt status, who do you think will pay the price to make up the difference for their lower profits?

Before you consider CCC or bankruptcy, which now requires that you enroll in a credit counseling program, you owe it to yourself to see if you qualify for debt settlement.

• Credit counseling typically takes 5 to 7 years to complete and you will be required to pay the entire debt you owe, plus fees.
• Debt settlement typically takes only 3 years and can reduce the debt you owe by an average of 40 to 50% (not including fees). You can obtain a free debt consultation from Credit Card Relief™ by clicking here. They can help you determine the best solution for getting you free of debt. For more information, read my blog dated September 29, 2006.

If you do choose the credit counseling approach, be sure to do your homework.

• Make sure the company is certified by the National Foundation for Consumer Counseling (NFCC).
• Compare fees to make sure you are not paying excessive fees.
• Check with the Better Business Bureau to see if there are any outstanding complaints against them, especially regarding timely payment to creditors.

Purchases vs. Cash Advances - Credit Card Gotchas

This blog is the third of several in which I will address the many gotchas the Credit Card industry uses to its advantage to add to its billions of dollars in revenue each year. What you don’t know or don’t understand about Cash Advances on your credit card will cost you money, so read these, and then study the fine print in your contract.

Purchases vs. Cash Advances – Have you ever received those “convenient” checks in the mail from your credit card company? Before you write one, be sure to read the fine print. Those credit card checks are usually treated as cash advances! Card issuers tout these checks as an easy way to pay off bills or acquire extra spending money. While they may be convenient, that convenience comes at a price. The charge on cash advances is not the same as the regular interest rate on charge purchases. It is usually significantly higher and there is typically no grace period (period of time before interest charges begin). While your regular rate may be 17 to 18%, your cash advance rate can be 20 to 25% and the interest charge begins at the time of the advance. Some creditors charge a flat fee for cash advances, regardless of the amount of the advance and some even charge a combination of the two: flat fee plus interest.
Be sure to read your credit card statement each month.

You may occasionally find that a charge that you considered a “purchase” was actually treated as a cash advance by the credit card company. If you use an ATM machine for a cash advance, there can be an additional charge by the ATM’s bank.

Another gotcha occurs when you make a payment toward your balance. Most issuers apply payments to purchases before they apply payments to cash. If you carry a balance on your card, this means that you will continue to pay that higher interest rate on your cash advances until you pay off your entire balance.

And there is one more legal gotcha on cash advances: If you get into debt and have to consider bankruptcy, cash advances are exempt from Chapter 7 discharge of debts. You will still have to pay back any cash advances.

Becoming dependent on cash advances to "make ends meet" can be a sign of serious debt problems.

Are You in Credit Card Trouble?

If you have credit card debt over $5,000, are struggling to make the minimum payments each month, take out new cards to help pay off old card balances, or seriously thought you might need to file for bankruptcy, you may qualify for Debt Settlement. You can obtain a free debt consultation from Credit Card Relief™ by clicking here. They can help you determine the best solution for getting you free of debt. For more information, read my blog dated September 29, 2006. You owe it to yourself to check out your options for eliminating your debt.

More Credit Card Gotchas

This blog is the second of several in which I will address the many gotchas the Credit Card industry uses to its advantage to add to its billions of dollars in revenue each year. What you don’t know or don’t understand about the fine print on your credit card contract will cost you money, so read these, and then study the fine print in your contract.

This blog addresses fees and penalties.

The credit card industry takes in over $40 billion a year in fees and penalties alone.

Late fees – Like interest rates, there is no limit to the amount credit card companies can charge you for being late on your payment. In 1996, in the case of Smiley vs. Citibank, the U.S. Supreme Court lifted the limits on late fees. As a result, credit card companies have more than doubled their revenues from late fees and penalties. Today, even one day late can result in a charge of as much as $39 or more. There are even cards that expect payment by a certain hour of the day.

Over the limit fees - The credit limit is the maximum total amount for purchases, cash advances, balance transfers, fees, and finance charges you may charge or incur on your credit card. If you go over your limit, you will be charged an over the limit fee that averages around $29. Know your credit limit and know how much you are charging.

No-Balance Fee - Believe it or not, some credit card companies will actually charge you a fee of $2 if you pay off your balance.No-Balance Fee - Believe it or not, some credit card companies will actually charge you a fee of $2 if you pay off your balance.

Inactivity Charges – You can actually be charged for NOT using your card. Some credit card companies will charge a $15 fee if your card remains inactive for more than six months.
Transaction Fee - Card holders are usually charged a transaction fee for charges other than purchases, such as cash advances. These fees are typically a percentage of the transaction amount but can be a fixed fee.

Transaction Fee - Card holders are usually charged a transaction fee for charges other than purchases, such as cash advances. These fees are typically a percentage of the transaction amount but can be a fixed fee.

Are You in Credit Card Trouble?

If you have credit card debt over $5,000, are struggling to make the minimum payments each month, take out new cards to help pay off old card balances, or seriously thought you might need to file for bankruptcy, you may qualify for Debt Settlement. You can obtain a free debt consultation from Credit Card Relief™ by clicking here. They can help you determine the best solution for getting you free of debt. For more information, read my blog dated September 29, 2006. You owe it to yourself to check out your options for eliminating your debt.

Credit Card Gotchas

This blog is the first of several in which I will address the many gotchas the Credit Card industry uses to its advantage to add to its billions of dollars in revenue each year. What you don’t know or don’t understand about the fine print on your credit card contract will cost you money, so read these, and then study the fine print in your contract.

This first blog covers interest rate gotchas.

Low introductory rates – I don’t know about you, but, on average, I receive one new credit card offer in the mail each day, attempting to entice me with low introductory rates. These lower rates typically apply for 6 months up to 12 months and usually cover balance transfers. Sounds great, right? So why offer these low rates? Credit Card companies are seeking “revolvers”, those over one million consumers who carry a balance on their credit cards each month. Creditor statisticians have determined that the average debt-carrying consumer will continue to charge new purchases and won’t pay off his/her balance during that introductory period. They are hoping you will transfer your balances from competing cards to their card so they can earn the interest on those old purchases you’re still paying on, along with all future purchases. Here is how they expect to make their money:

First, the issuer benefits from the balance transfer fee it charges. The average fee is 3% of the amount transferred. Some issuers limit the fees to $75, but a growing number are doing away with the limits. This means that a transfer of $10,000 could cost you $300 in fees alone.

Second, most issuers only grant a "grace period" on purchases if you have completely paid off your previous balance. If you transferred a balance to take advantage of the low introductory rate and you don’t plan to pay off the balance until the end of the introductory period, say 6 months, interest charges will begin to accrue on each new purchase from the day you buy them.

Third, issuer terms usually state that 100% of each payment you make is applied to the balance with the lowest interest rate. Since your new purchases are typically subject to a higher interest rate, they will be the last in line to get paid off. Your payments will be applied to that balance you transferred instead of toward your new purchases. So your new purchases will sit there, building up interest at the highest rate, and you can't stop it without paying off the balance transfer in full, the very balance you had hoped to pay off over time. The only way around this is to take out the low introductory rate card and use it exclusively to pay off your old balances. Make all new purchases on another card until the old balance is paid off. Focusing only on the introductory rate without reading all the terms and conditions could leave you paying more in interest and fees than you did on your old card.

Fourth, if you don’t pay off the balance transferred during the introductory period, once the period ends, they start making higher interest on that left over balance, along with all your new purchases.

There is one more potential gottcha buried in the fine print. If you happen to be late on your payment for any reason during the introductory period, your rate will immediately skyrocket, in some cases as high as 30%. Before you sign up, be sure you know what all the terms are for that seemingly wonderful new card offer!

Interest rate that can change at any time – Unlike a conventional loan where you borrow money at a fixed rate through the life of that loan, you need to understand that the credit card companies reserve the right to change their interest rates at any time, as long as they give you 15 days notice. As the rates go up, so do your minimum payments.

No limit on interest rates – Since the Great Depression, there are no longer Federal usury laws governing the amount of interest a creditor can charge for a loan or credit cards. Credit Card interest rates currently range from around 13% for those with “good” credit to as much as 35% for card holders with poor credit or those considered to be “at risk.” Control of rates has been left up to the states, but several states have very weak or no usury laws. Look at your credit card statement and you will likely see that the issuer is located in Utah, Arizona, Virginia, South Dakota, Delaware, or New Hampshire even though you may have obtained your card through your local bank in another state. That’s because these states have no or high caps on the amount of interest creditors can charge and it is the issuing state’s usury law that sets the limit regardless of where you, the card holder lives.
Universal Default Clause – Even if you make your credit card payments on-time, there is a clause called the “universal default clause” that can allow your credit card company to raise your interest rate if they find out that you defaulted or made late payments to any other creditor or even on a bill, such as your phone bill. This clause may also be executed if they determine your debt to income ratio to be too high. It is not uncommon for the rate to double! Again, when your rate goes up, so does your minimum payment. This clause has become standard in about a third of all credit card contracts.

Are You in Credit Card Trouble?

If you have credit card debt over $5,000, are struggling to make the minimum payments each month, take out new cards to help pay off old card balances, or seriously thought you might need to file for bankruptcy, you may qualify for Debt Settlement. Read my blog dated September 29, 2006. You owe it to yourself to check out your options for eliminating your debt.