What are credit counseling services?
There are many credit counseling services around, probably too many. The idea behind most of those credit counseling services, you see, isn't always what it seems, so we will try to clarify what you, a consumer, can expect while dealing with any given credit counseling service.
The first thing counseling service will do is to offer to you an enrollment into Debt Management Plan or DMP which allows consumers to pay off unsecured debts with a single, consolidated monthly payment to the credit counseling agency. The credit counseling agency then disburses that money to the creditors whose debts the DMP covers.
Such debt management plans generate revenue for credit counseling services in two ways.
First, some creditors voluntarily rebate to counseling agency a small percentage of the funds that the organizations disburse to them. These payments are called "Fair Share" contributions. Credit card companies and other creditors can deduct these payments from their taxes as donations.
Second, some credit counseling services solicit "contributions" or "donations" from DMP enrollees, usually consisting of up-front and monthly fees. And... oops, more than often your voluntary contribution becomes a mandatory fee that is automatically deducted from each monthly payment you make without adequate disclosure of how much is going to the creditors and how much goes to the credit counseling service. We call it a rip-off.
With that said here are 6 rules that consumer must follow stringently:
1. Don't pay a set-up fee of more than $50 to any credit counseling agency.
2. Verify that your first month's payment will be sent to your creditors.
Why this verification? Because some credit counseling services keep your first month's payment. That was one of main accusations against major agency you see and hear on TV and radio. They forgot telling consumers that it was ... well, the very voluntarily contribution we just talked about.
3. Pay careful attention to the fees an agency charges, the nature of the services it offers, and the terms of the contract.
4. Make sure that your creditors are willing to work with the agency you choose.
5. Make sure what kind of information will appear on you credit report after enrolling in Debt management program. That was a huge issue with other well known credit counseling services. They promised that consumers who enrolled in its program would be able to pay off their debts at a substantially lower rate but forgot to mention the effect of the program on their credit report. Specifically, consumers never were told that, as a result of the program, negative information would likely appear on consumers' reports and stay there for seven years. In the end many consumers had to file for bankruptcy.
6. Use agencies that offer actual counseling and education, instead of simply enrolling you in DMP.
How consumer credit counseling service is funded?
Most of the funds comes from voluntary contributions from creditors like Credit Card companies who work with the counseling service. Most counseling services started by Credit Card companies for two reasons: to get some or all of their money back from customers who cannot pay and to write off their contributions as donations... The rest of the funds comes as fees from consumers.
Credit Counseling Service / Agency Checklist
It’s important to feel comfortable and confident about your credit counseling agency. Here are some questions you should ask before deciding.
Is this agency a nonprofit organization?
Will I be informed of any fees associated with the services being offered?
Are agency services confidential?
Will they devise a plan tailored to fit my needs?
Are the counselors certified?
Are budget and credit education opportunities offered?
Will my funds be protected?
Is the agency accredited?
Choosing your credit counseling service agency
How to choose a credit counseling agency?
First of all, interview several agencies. Then check with your state attorney general, local consumer protection agency, and the Better Business Bureau to find out if consumers have filed any complaints about the service you're considering. Any reputable counseling agency will send you information about them and the services they provide without requiring you top provide any details about your situation. If they won't, stay away from them.
According to Bob Hammond in his book 'Repair Your Own Credit' there are the questions you should get answered before signing up for credit counseling:
1. What services do you offer?
2. Do you have educational materials that you can send to me for free?
3. Will you help me to solve my immediate problems?
4. Will you help me to develop a plan for avoiding problems in the future?
5. What are your fees? Are there set up fees? Do I have to pay anything before you can help me?
6. What's the source of your funding?
7. Will I have a formal written agreement or contract with you?
8. How soon can you take my case?
9. Who regulates, oversees, and /or licenses your agency?
10. Will I work with one counselor or several?
11. What are the qualifications of your counselors? Are they accredited or certified? If not, how are they trained?
12. What assurance do I have that information about me will be kept confidential?
In addition, if you're planning to participate in the debt repayment plan, you should ask these questions:
1. How much do I have to owe to use your services?
2. How do you determine the amount of my payment?
3. What happens if this is more than I can afford?
4. How does your dept repayment plan work? How will I know my creditors have received payments? Is client money put in separate account from operating funds?
5. How often can I get status reports on my accounts?
6. Can I get access to my accounts online or by phone?
7. Can you get my creditors to lower or eliminate interest and finance charges or waive late fees?
8. Is a debt repayment plan my only option?
9. What if I can't maintain the agreed-upon plan?
10. What debts will be excluded from the debt repayment plan?
11. Will you help me plan for repayment of these debts?
12. Who will help me to if I have problems with my creditors pr accounts?
13. How secure is the information I provide to you?
