Credit Counseling agencies are non-profit organizations that are supposed to help consumers manage their money and their debt at no charge. Unfortunately,
- many of them are scams,
- even the legitimate ones are often of little help, and
- just signing up with one will damage your ability to obtain credit.
How Credit Counseling is Supposed to Work
- Credit counselors will look over all your financial documents, including payroll slips, monthly bills, checking account statements, mortgage statements, and tax forms.
- They will ask you about your living expenses, and life situation.
- Together you will determine how much of your debt you can afford to repay each month.
- They will contact your creditors to try to negotiate a lower interest rate or better terms.
- They will send you a single bill each month, which goes to paying off your debts as efficiently as possible, putting all the money beyond the minimum payments towards paying off the highest interest debts first.
- They will help you to set up and stick to a budget each month.
What Can Happen
- Although credit counseling agencies claim to be non-profit, many ask for high “voluntary” fees to enter the program and stay with it each month. They can be very insistent, using guilt and pressure to get you to pay.
- Sometimes criminals will pose as credit counselors, just taking your money and not paying your creditors at all.
- The fact that you have signed up for a credit counseling program shows up on your credit report, and stays there for seven years. Many creditors see this and run the other way. (It does not, however, affect your credit score.)
- Many creditors will refuse to negotiate with credit counselors, so there is often very little they can do to help you. If you already are keeping good track of your finances, their services many be a waste of time and effort.
How Bad Is It?
On the federal and state level, the government is scrambling to shut down illegitimate credit counseling agencies. Both the FTC (Federal Trade Commission) and the IRS have recently taken steps to break up some of the worst of these scams. But the government moves slowly and doesn’t have the resources to take on all the small companies at once.
Last year the director of the Bureau of Consumer Protection of the FTC testified to congress, “In the last decade, the credit counseling industry has experienced dramatic growth…. The nature of the industry has also changed. Whereas it was once composed mainly of small, local credit counselors, the last decade has seen the rise of large, high-tech organizations that aggressively market their services to consumers…. Many appear to offer little or no individualized credit counseling, but rather urge all of their clients to enroll in a debt management plan without consideration of their particular financial situation.”