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Beware of 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” or “get you a fresh start.”

Sometimes credit counselors deliver on their promises. Other times and often, they don’t and consumers wind up much worse off. This article will tackle the pros and cons of credit counseling.

AmeriDebt, a former credit counseling company 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, finance companies and the credit card industry. 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 that such help wouldn’t work and 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 credit 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 and better manage their finances 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.

You should first, however, approach your current lender to see if they offer any type help for your specific situation. Some lenders, such as finance companies, for example, have a long history of lending to and working with people in delicate credit situations. Finance companies were the first in the industry to accept settlements and to show a willingness to adjust terms to salvage an account. A few credit card companies have also started to be a little more understanding concerning light delinquency and the need to work with their customers. Banks unfortunately, are still lagging way behind all their industry competitors and the results are reflected in their increasing delinquencies and eventual losses.

Credit counseling is not a good option if you're current on your bills and able to pay the minimums. It is not a good option if you haven’t yet tried to work with your current lender to see if they can offer any help. Credit counseling, with all of its questionable practices should be your second to last option only slightly, sometimes better than bankruptcy.

In short, you need to tread carefully and not believe everything you hear. Attorneys as well as credit counseling companies can only prosper on your financial failings and eventual ruin. Here are some of the things you need to consider before signing up with a credit counselor:

Is it accredited? You'll want a counselor affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. You can find affiliated agencies at or

What do regulators say about it? At a minimum, make two calls: one to your local Better Business Bureau and one to your state attorney general's office. Ask how many complaints have been made about the agency and see if any regulatory actions are pending against them.

What does the agency say about its services? Avoid an outfit that says credit counseling will have no negative impact on your credit or one that promises to settle your debts for less than you owe without affecting your credit. Such unrealistic promises are a clear sign that you're not dealing with a legitimate operator.

What fees are involved? Legitimate credit counselors have had to raise their fees in recent years, but if you're paying lots of money to set up your plan, you're probably paying too much. Ask when and how much will creditors get paid and know that missing or late payments can kill your credit score. Make sure the counselor shows you in writing, how much of each monthly payment you make will go directly to your creditors and when the payments will arrive. As always, it’s Buyer Beware…

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