When will we ever learn? It seems that as a group we Americans are addicted to debt – credit card debt, student loans, car loans, signature loans, you name it. The debt burden on American households keeps rising, and as a result, when people get in so deep they feel like they’re drowning, many consumers turn to credit counseling agencies for help. But if you’re considering using one of these agencies to help you climb out of the debt hole you’re in, be careful – choose poorly and you might discover that the cure is worse than the disease.
Credit Counseling Can Be Helpful, But It’s Not a “Quick Fix”
The story about shady tactics in the consumer credit industry comes from this article in USNews. It’s a revealing article that we first came across it one year ago, and the gist is straightforward: as U.S. consumer debt worsens, people will turn in desperation to anyone who claims to have a solution, but they might be making a really bad decision if they opt for some of the “quick-fix” debt repair schemes that are out there.
“Americans have a debt problem,” USNews reports. According to the Federal Reserve Bank, in mid-2018 total household debt actually topped $13 trillion. Not only is that a record-setting figure, but there’s substantial evidence that consumers aren’t keeping up: almost 10 percent of households currently have a debt that has been sent to collection. People who find their indebtedness too much to bear often turn to credit counseling agencies to find help, typically in the form of debt-management coaching designed to control and eventually eliminate debt and to get them back on solid financial footing. It’s a worthwhile goal, and many of these organizations do excellent work – but not all.
Unscrupulous Credit Counseling Firms Use Shady Tactics, Provide Little Support
“Not all credit counseling agencies are created equal,” USNews warns. “While some are accredited nonprofits, others are for-profit ventures that charge high fees and use questionable tactics, such as asking clients to dispute legitimate debts on credit reports or pay to become an authorized user on a stranger’s credit card.” There have been cases reported where scam “credit repair” companies “drain the wallets of already cash-strapped families” but never succeed in helping them gain control over debt. “What gets people in trouble is they are looking for a quick, easy fix,” one Gig Harbor wealth adviser told USNews. “If it’s legitimate, it’s not going to be a quick fix.”
As the USNews article explains, many nonprofit credit counseling agencies offer both free and paid services. “They may offer complimentary consultations, financial literacy workshops or even one-on-one budgeting sessions free of charge. However, if you sign up for a debt management plan, expect to pay for the service. Debt management plans through nonprofits often have a startup fee of $30 to $40 and monthly fees of $20 to $40.” In most instances, clients are instructed to make a monthly payment directly to the credit counseling agency which then apportions it out to the creditors. “They also negotiate lower interest rates,” says USNews, “and may be able to have fees waived and can help reduce or eliminate the number of collection calls a person receives. Keep in mind, most plans take 36 to 60 months to complete.” Many agencies also help consumers fix errors on their credit reports.
Is Credit Counseling Necessary? No, But the Do-It-Yourself Approach Can Be Complicated
As the article attests, most consumers could do all this without the help from an agency, but the process can be time-consuming and complicated, especially where many creditors are involved. “The benefit of using an agency is that they have experience in negotiating debt payments and disputing incorrect information on credit reports. Paying an expert to do these tasks not only saves a person time, but can minimize the stress of having to navigate unfamiliar territory.” If the consumer is working with a solid, reputable agency, the fees are more than worth it.
However, USNews warns, certain practices should set off warning bells that the firm you’re talking to could be less than reputable. “While good credit counseling agencies are transparent about their fees and services, unscrupulous ones can be evasive and pushy,” says the article. “Red flags include demands for payment before services start, failure to provide a contract, insisting on access to your bank account and promises of debt repair that sound too good to be true.” Some of these practices are prohibited under a federal law called the Credit Repair Organizations Act. Credit agencies are not allowed to collect payment before services are rendered, and they have to be fully transparent about the total cost you as a consumer will pay for their assistance.
The article also warns of another unethical practice some shady companies employ as a way to artificially (and temporarily) hike up a client’s credit score. “Some companies will instruct people to dispute all debt on their credit report, even accounts they know are legitimate,” says USNews. “Since debts are removed while credit bureaus investigate, this can provide a temporary boost in a person’s credit score but no long-term benefit.” This practice has been outlawed in some states but is still technically legal in others.
If You Need Professional Guidance, Don’t Hesitate to Ask for Help
Fortunately, there are some screening tools consumers can employ to find reputable credit counseling and repair assistance. The National Foundation for Credit Counseling offers a wide range of resources as well as certification for trusted advisers. Another accrediting organization called the Financial Counseling Association of America is a helpful resource, as is your local chapter of the Better Business Bureau. “Asking for help with debt can be difficult,” the USNews article acknowledges. “Those in trouble may be hesitant to let others know, but there should be no shame in reaching out for a lifeline if finances become unmanageable.”
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(originally reported at https://money.usnews.com)
