Credit Counseling: What You Need to Know
You’ve likely seen ads everywhere—on TV, the radio, and online—promising to lower your interest rates, reduce your monthly payments, stop collection calls, and put you on the path to financial freedom.
Sometimes, these credit counselors do deliver on their promises. However, in many cases, consumers end up worse off. Let’s explore the pros and cons of credit counseling so you can make an informed choice.
When Credit Counseling Goes Wrong
AmeriDebt claimed to help hundreds of thousands of people pay bills and avoid bankruptcy. They made that claim until 2003 when the Federal Trade Commission sued them. The FTC said AmeriDebt misled customers about fees and services, which left many people in worse financial shape.
Even worse, AmeriDebt operated as a nonprofit while secretly funneling money to a for-profit company. After the lawsuit, the company stopped taking new clients. However, it referred people to another credit counselor known for making similar promises.
The Rise of For-Profit Credit Counselors
Previously, credit counseling was a quiet field led by the National Foundation for Credit Counseling. This nonprofit helped people avoid bankruptcy by working with banks and credit card companies to lower interest rates and payments.
Lenders sent part of each payment—called a “fair share”—back to the counseling agency to support its work. But in the 1990s, consumer debt surged. As a result, new for-profit counselors joined the scene, trying to profit from lender contributions.
How Bad Practices Took Over
To get more clients, these new agencies targeted people who didn’t really need help—just lower rates. Eventually, major creditors became frustrated and stopped their “fair share” payments. They also began steering customers away from credit counseling, wrongly saying it hurt credit scores like bankruptcy.
Unfortunately, things only got worse. Many of these newer agencies kept the first month’s payment or added hidden fees. Some didn’t send payments to creditors at all, leading to late fees and damaged credit. Former employees testified to Congress that they used fake names and high-pressure sales tactics. Their focus was collecting money, not helping people learn how to manage debt.
Should You Consider Credit Counseling?
Despite these problems, you shouldn’t avoid all credit counseling. Legitimate help is still out there. If you’re behind on bills, unable to make minimum payments, or showing signs of serious financial distress, credit counseling may be better than filing for bankruptcy.
However, if you’re current on bills and paying more than the minimum, credit counseling may not be the right fit. As noted earlier, the act of enrolling won’t hurt your credit score. Still, some lenders may respond negatively.