Certainly, you’ve seen the ads on television. Happy people are shown prancing though fields of green, celebrating their financial freedom. The ad would have us believe that all we have to do is contact the consumer credit counseling service being advertised, and we are guaranteed emancipation from debt, For the millions of Americans who are in debt over their heads, the idea of having their debt load reduced is appealing. But not all of these services are as magnanimous as they seem, and a wise consumer needs to do a bit of research before signing on the dotted line at one of these agencies.
There are two types of consumer credit counseling services – the profit-based organizations and the non-profits. The difference between the two is important to understand. Profit-based agencies charge a fee to consumers to consolidate their debt, while the non-profits do not charge a fee for basic services, instead, receiving payments from the creditors with whom they work. Additionally, you will be encouraged to participate in a money management program to help you avoid future credit problems.
How the For-Profit Agencies Work
A consumer credit counseling agency that is profit-based, will advertise free counseling, which entails creating a balance sheet showing your debts, expenses, and income. Then, they will figure out a monthly payment that you can afford, and then offer a debt consolidation loan, which they will use to pay off all of your debt. You, in turn, will repay the agency a fixed amount each month until the loan is repaid. The problem with this is that the agency charges interest on this loan, and the rate may be so high that, in the end, you will have paid out more than the total of your old debt.
How a Non-Profit Agency Works
A non-profit consumer credit counseling service will evaluate your situation, calculating your debts, expenses, and net income. But, rather than offering a loan to pay the bills, they will contact your creditors and arrange for lower interest rates, forgiveness of late fees and over-limit charges, and set up a repayment plan directly with them. The non-profit agencies get a commission from the credit card companies as a fee for recouping their money. The consumer writes a check to the agency each month for the total of the payments, and the representative will pay the creditor directly. Once your debts are paid, the arrangement is complete.
The non-profit agencies also work with the consumer to help them set up a money-management program so that they can avoid future credit problems. There is normally no charge for this service, but the agencies do accept and encourage donations from people who may be able to afford this.
How to Avoid a Scam
All non-profit consumer credit counseling agencies should be accredited by the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA). These organizations establish standards by which agencies must abide in order to receive accreditation. These standards include:
Recognition by the Internal Revenue Service as being not-for-profit
The agency must fulfil all local ordinances and have valid business licenses for the municipality that they serve.
Provide annual audits of clients’ accounts
Pay creditors bi-monthly
Have established programs to education consumers
Work with consumers to develop a financial plan that will help them reestablish their credit.
Make quarterly financial statements available to client
You should beware of any agency that pushes too hard for payment up front. The FTC has laws in place protecting the consumer by making it illegal to pay money to get a loan. Additionally, you should never provide personal banking information or even your Social Security number until you are comfortable with the arrangement. Make sure that all details of the arrangement are provided to you in writing, and before signing anything, read the contract carefully, and ask questions. If you are unsure, don’t sign! A non-profit agency will allow you time to consider their plan and will not require any kind of payment for the initial counseling session.
If you are uncertain, contact your state’s Attorney General’s office. You can also contact the FTC to find out if this particular agency has had any complaints filed against it. The local Better Business Bureau can also provide information about agencies in the area against which complaints have been filed.
Summary
Consumer credit counseling agencies can provide a much-needed bridge between financial insecurity and stability. A reputable agency can help you reduce your debt load and avoid bankruptcy. With a bit of research and caution, you can avail yourself of the service of a good agency and find yourself on the road to credit repair.