TRUTH 6 Credit counseling agencies

Legitimate credit counseling agencies can be a boon to people with debt or credit problems. Among their most important services, they provide financial education programs to help you identify the behavior that may have resulted in your debt problems. In many circumstances, they can negotiate a plan with your creditors through which your creditors may agree to accept reduced payments, reduced finance charges, or even waived late fees. Many times they will require you to pay a single payment each month to the credit counseling agency, which will then, in turn, pay your creditors the agreed-upon amounts as part of a comprehensive debt repayment plan.

Such plans often take from one to four years to liquidate your debts. Many credit counseling agencies charge little or nothing for their services, while others charge small monthly maintenance fees. If this sounds too good to be true, you are right to be skeptical. However, many credit-counseling agencies are actually partially funded by payments from the credit card companies and other creditors. These payments from the credit card companies and other creditors are called fair share payments and represent a classic example of a win-win solution. Through such a plan, the creditors can help support an industry (the credit counseling agencies) that helps the credit card companies receive a larger portion of their outstanding credit card debt than if the consumers went bankrupt or if the debts became uncollectible while, at the same time, reducing the amount of the debt that the consumer has to pay. Originally, the fair share payments to the credit counseling agencies averaged between 12 and 15 percent for managing a debt management plan; however, in recent years, these payments have been reduced to an average of 6 percent.

Unfortunately, giving an industry that does good work a bad name are a large number of scam credit counseling agencies that hide behind tax-exempt status and have little interest in helping you fix your credit but are quite interested in getting some of your money while your debt and credit problems continue to grow.

So how do you tell the good guys from the bad guys in this industry? If an agency wants a large initial payment before it does anything for you, that is your signal to walk out the door. Federal law mandates that you are not required to pay a credit repair service until its work has been completed.

If an agency suggests that you apply for an Employer Identification Number to establish a new clean credit history, just say no. That is the first step in file segregation, and it’s illegal.

If your first payment goes to the credit-counseling agency instead of your creditors, this is a good sign that it’s a bad company.

Finally, if the agency’s solution for everyone is a consolidation loan, beware. Credit counseling scams often involve being referred to another company they control that will lend you money to consolidate your debts when such a loan is unwarranted.

How to pick a credit counseling agency

  Comparison shop. Smokey Robinson was right: “You better shop around.”

  Check out a few agencies and don’t provide any personal financial information before you determine which agency you wish to use.

  Only consider credit-counseling agencies that are affiliated with the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA). These are legitimate companies that adhere to ethical standards.

  Investigate whether the company you’re considering has any complaints against it with your state’s Attorney General’s consumer protection division as well as the Federal Trade Commission.

  Don’t pick a credit-counseling agency that can be found only in the phone book or on the Internet. Go to its office.

  Find out the range of services the agency provides and make sure it includes financial counseling and not just the establishment of a debt management plan.

  Make sure you understand the costs as well as any and all fees involved.

  Make sure that the agency won’t share your personal information with any other entity without your approval.