A Cautious Approach to Credit Counselors

In the United States, credit counselors and agencies have a complicated reputation. On one hand, they help lower the total aggregate debts accrued by individuals by reducing interest rates and financing fees. On the other, these same agencies stand to make a substantial profit thanks to consumer debt. Both creditors and banks give these agencies service fees for helping them set up Debt Management Plans. Credit counseling organizations can earn up to ten percent of a “fair share” income fee from banks, and the National Foundation for Crediting Counseling has admitted that one of their primary customers is in fact bankcard companies. Due to this fact, some critics have described credit counseling agencies as the “collection wing” of banks and creditors.

A Background on U.S. Credit Counselors and Agencies

In the U.S., credit counseling organizations were first created in 1951 through the National Foundation for Credit Counseling, which is currently the country’s largest counseling “umbrella” organization. Their original goals were to encourage financial literacy amongst consumers, as well as to help their customers avoid bankruptcy.

Credit counselors work to help individuals who have incurred serious debts which they cannot pay back. As the most reliable counselors have been certified through the National Association of Certified Credit Counselors, consumers should only work with certified credit counselors. These financial professionals conduct a careful review of all aspects of the customer’s finances, including all accumulated debt and monthly/annual income. After this review, credit counselors create what is called a Debt Management Plan (DMP) for each individual customer, which in turn creates a monthly payment plan arising from the total accumulation of debt owed. The DMP is created through a negotiated process with the creditor.

DMP monthly payments usually reflect realistic repayment amounts with reduced interest rates. When customers sign on to a DMP, they close their accounts with their original debtors, as the credit counseling organizations take over the restricted accounts. Successful credit counseling programs will not only lower the interest rates for accumulated debt for customers, but DMPs will also bring all delinquent accounts current. Although this does not erase any past delinquencies for customers, it does allow them to “start from scratch,” in order to start rebuilding a stronger credit history.

Enrolling with Credit Counseling Agencies

Today there are many legitimate credit counselors working for nonprofit organizations. For example, the National Foundation for Credit Counseling has more than 700 community-based offices across the country, and annually, more than three million customers seek financial counseling from the National Foundation. Customers should only work with credit counseling organizations that have been granted a non-profit 501(c)(3) exempt status by the Internal Revenue Service (IRS), this is the case with the NFCC and the majority of credit counseling services.

Consumers interested in enrolling in a DMP should first conduct research on credit counseling organizations. The IRS has denied nonprofit status to about 30 different credit counseling organizations due to their continuing enforcement of “voluntary” contributions and excessive hidden fees. When meeting with any credit counselor, come ready with a set of questions to ask each credit counselor.

Here is a sample list of questions you can ask in order to get as much information as you can about specific credit counseling agencies and their counselors:

  • Does the credit counseling agency have any hidden fees?
  • Does the agency have a 501(c)(3) status? If not, why not? Was this status denied to them?
  • What percentage of credit counselors at the agency are certified? Is the credit counselor you are working with certified?
  • Are there any pending lawsuits from customers or the Federal Trade Commission against the credit counseling agency? Has the agency been sued in the past?
  • What do the DMP contract agreements frequently look like? What is the average amount of time that most customers take to pay of their debts?
  • Does the credit counseling organization receive a “fair share” fee from a bank or creditor, and if so, how high is this fee?

Debt Management Plans

Debt Management Plans can become a useful and systematic way for individuals to pay back accumulated debt. It allows consumers to consolidate relevant debts into one account, and many creditors to waive financing fees. Some creditors also reestablish your credit line after you have paid off all your debt, although this is not always the case.

On average, it can take anywhere from 30 to 60 months, rather than 20 plus years, to repay debt through a DMP. Once an individual establishes a DMP through a credit counseling agency, 100 percent of the entire bill is paid back to the creditor by the credit counseling agency. After this has happened, a monthly payment plan is established and customers continue to pay their debt back through the credit counseling agency.