The Real Scoop on Credit Counseling



You have probably seen ads on television, the radio, and the internet promoting to “lower your interest rates,” “reduce your monthly payments,” “end collection calls,” and “get you on the road to financial freedom.”

Sometimes credit counselors deliver on their promises. Other times, consumers wind up much worse off. The following article will tackle the pros and cons of credit counseling.

AmeriDebt insisted that it helped hundreds of thousands of consumers pay their bills and avoid bankruptcy. It continued insisting, in fact, right up until the Federal Trade Commission sued the company in 2003. The FTC said AmeriDebt lied to its customers about the fees it charged and the services it offered, leaving many of them worse off.

What’s more, regulators said, AmeriDebt posed as a nonprofit company while actually funneling money to a for-profit arm. AmeriDebt responded by closing its doors to new customers-but sending them to another heavily advertised credit counselor making similar claims of quick-and-easy solutions to debt problems.

Credit counseling used to be a sleepy field dominated by the National Foundation for Credit Counseling, a truly nonprofit organization that was funded in large part by contributions from banks and credit card companies. Its mission was to negotiate lower interest rates and payments for cash strapped consumers so that they could avoid bankruptcy. The lender receiving these payments would return a portion of each check-a contribution known as “fair share”-to the credit-counseling agency to fund its operations.

As consumer debt spiraled in the 1990s, however, a new breed of credit counselor emerged, eager to get a piece of those lender contributions. To boost market share, these new counselors started going after customers who were perfectly able to make their payments but who just wanted a lower interest rate.

Disgusted, the major creditors started dropping their “fair share” contributions, making it tougher for the older agencies to make ends meet. Instead of supporting legitimate counselors, some credit card companies even tried to steer consumers away from counseling, telling them erroneously that such help was as bad for their credit as bankruptcy.

But that wasn’t the worst of it. Many of the new credit counselors kept the first month’s contributions or charged other fat, hidden fees. Some failed to pass along consumers’ contributions at all, causing multiple late payments that devastated scores. Former employees of such firms told Congress that they were forced to use fake names and employ high-pressure “boiler room” tactics to sign up new customers. The emphasis was on collecting fees-not providing counseling or offering education that might help consumers understand how to avoid debt in the future.

The fact that there are so many bad guys out there shouldn’t make you avoid credit counseling entirely if you could benefit from legitimate help. If you’re already behind on your bills, unable to make minimum payments, borrowing from one card to pay another, or otherwise demonstrating signs of extreme financial distress, credit counseling might be preferable to bankruptcy.

Credit counseling is not a good option if you’re current on your bills and able to pay more than the minimums. As I explained in a previous chapter, credit counseling itself won’t hurt your credit score, but the reactions of some of your lenders might.

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