Are you in over your head with debt? Thinking about contacting a credit counseling agency to help? Before you do, read these tips to make sure you know exactly what you are getting into. While there are many reputable and honest credit counselors in this more than $5 billion industry, there are also many fraudulent agencies and the last thing you want is to end up with more debt and further harm your credit.
A decade ago, the credit counseling industry was dominated by the National Foundation for Credit Counseling, made up of nonprofit affiliates, typically known as Consumer Credit Counseling Services, whose main purpose was to negotiate lower interest rates and payment plans for people who were behind in their payments. Today the Consumer Credit Counseling Service can be found in most cities, and they have plenty of competition, due to a rise of consumer debt throughout the 90s. Their competition comes in the form of companies with millions to spend on advertising, especially on the Internet with deals that usually are too good to be true.
The purpose of credit counseling is to help those who are behind on their debts, usually credit card debt, get back on their feet. They do this typically by negotiating lower payments with credit card companies, as credit card debt is usually what consumers get overwhelmed with, and then the counseling agency makes the payments each month after the consumer pays the credit agency.
Typically, counseling services negotiate lower payments with credit-card companies and other lenders, and then make the payments using a check or electronic funds transfer sent to them by the consumer each month.
So, how to the credit agencies make money? Sometimes the fees are paid by the lenders themselves, who send back to the credit agency a portion of the payments received. Others may just charge the consumer a flat fee, or a percentage on the amount owed.
It is the payment by lenders that has received the most criticism, as it has encouraged the growth of credit counseling services. Some agencies, as a result of competition, now go after consumers who may not have even fallen behind on their debts, with the promise of a lower interest rate. It is important for consumers to know that these plans can sometimes hurt their credit rating and are usually unnecessary. Credit repayment plans are usually only necessary for those who are already far behind on their payments. Consumers themselves can negotiate a lower interest rate by contacting their credit card company.
So when should you consider contacting a reputable credit counseling agency?
- When you can’t pay the minimums on your credit cards
- If you are consistently late paying one or more of your regular bills
- You are being contacted constantly by creditors and collection agencies
- Efforts to work out reasonable repayment plans with your creditors have failed
Typical plans take two to four years to complete. Responsible credit counselors will usually tell consumers if the payment plan will take more than five years to complete, declaring bankruptcy is usually the better option.
Once you have decided that credit counseling is the right move for you, you should fully research several companies before signing up. Some important red flags to look out for are:
- Large upfront fees. Consumer Credit Counseling Services typically charge only a $10 set-up fee. If the agency you contacted wants more, make sure you know what those fees are paying for and ask about the discrepancy.
- No accreditation. Valid credit agencies are affiliated with either the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.
- Delayed or missing payments. After you sign on with a company, make sure your money begins going directly to pay off your debts. Some agencies take your first months of payments as a fee and missing these payments will hurt your credit rating.
Some of the most important questions to ask potential credit counselors are:
- What services do you offer? You want an agency that offers a wide range of services, including budget counseling, savings and debt management classes.
- Do you offer free educational classes, services or other educational resources? Reputable agencies will offer these for free. Stay away from an agency that wants to charge for them.
- What are your fees? What is the fee structure? A set-up fee? Monthly fee? Get a specific quote in writing.
- In addition to helping me solve my immediate problem, will you help me develop a plan for avoiding problems in the future?
- What if I can’t afford to pay the fees? If the organization won’t help you because you can’t afford to pay, look elsewhere. There are many legitimate credit counselors who will help for little or no fee.
- Get a written, formal agreement and make sure you read it first. Make sure all verbal promises show up in writing.
- Are you licensed in my state?
- What qualifications do your counselors have? Are they certified or accredited and by whom?
- What are your confidentiality policies?
- How are your employees compensated?
Once you have signed on with an agency, make sure you remain in touch with them, as well as your creditors to be sure the debt is being paid off.