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Do Credit Counseling Agencies Ruin Your Credit?

Credit Wise (featured column)
by Jennifer Wallis

Let me disclose right from the start that I was employed by Consumer Credit Counseling Service (CCCS) so you may be asking yourself how impartial this article can really be. You just may have a point. However, I do know the industry quite well and will do my best to stick to the facts.

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No mudslinging here, I promise. I am going to clear up some myths about the industry and give some tips on how to find a reputable agency so that you may form your own conclusions.

If you find yourself in need of financial guidance, knowing where to turn for help can be a daunting task.  Rumors abound about the credit counseling industry. It seems that I could write my own book just regarding the controversies about credit counseling: “They are just out to make money,” “I hear that it ruins your credit,” “I’ve been told that it’s as bad as bankruptcy or a slow-pay,” “I read that they all work for the creditors,” “Don’t they keep your first payment as their fee?” Let me clear up a few of these myths:

“They are just out to make money”- It depends. 

You will probably want to steer clear of any for-profit organizations. However, just because an agency claims to be  “non-profit” does not mean that they are a charitable organization. The true definition of a “non-profit” agency is one who is operated exclusively to accomplish charitable or educational purposes. Some of the so-called “non-profit” agencies don’t exactly fit that description.

In my opinion, the most trustworthy agencies are the ones who help you get out of debt while simultaneously educating you to become a wiser money manager. This accomplishes the goal of solving your current debt issues while teaching you to avoid making those same mistakes again. If the agency does not offer educational programs in addition to a debt repayment plan, you may consider their motives.

If the agency just signs up everyone who qualifies for a repayment program, they may just be driven by greenbacks instead of the desire to really help people. In my agency, we find that about 33% of our clients need a repayment plan while the other 67% can solve their problems on their own. They just need some expert advice to get them started in the right direction.

“I hear that it ruins your credit”- Usually false.

First of all if you just receive credit counseling without going on a debt repayment plan, it’s confidential so no one will know that you ever attended a counseling session and it will have no effect on your credit. If you do need a repayment plan, it will likely be reported on your credit report by your creditors that you have entered a debt management plan.  This does nothing to lower your credit score or rating. However, some creditors may look at this and see it as a red flag. Many mortgage companies will want to you be on the debt repayment plan with a good pay history for one year before considering you for a loan.

Honestly, paying through a debt management plan probably is not going to look as good as paying every month, on-time, on your own. However, if you are behind or are in danger of falling behind, making payments every month through a debt management plan is probably only going to help you. To preserve your credit, it’s important to work with your counselor to ensure that the program is set up correctly, to make your payments on time, and to make sure the agency is making your payments on-time by monitoring your creditor statements. If you do those things, any effect on your credit will most likely be positive.

“I’ve been told that it’s as bad as bankruptcy or a slow-pay”- Usually false.

Again, creditors typically are not  going to give you a bad rating just for going on a debt repayment plan. They voluntarily cooperate with credit counseling agencies so it is to their benefit to help you succeed. A debt management plan is designed to help you repay your creditors and get out of debt while avoiding bankruptcy. Your credit rating reflects the timeliness of your payments so as long as you keep those current, it usually has little to no effect and is not a form of bankruptcy.

“I read that they all work for the creditors” - Partially true.

Credit counseling agencies do get some money from creditors. It’s called a fair share contribution. Some creditors agree to give the agency a percentage of what the client’s pay them. For example, if a client pays a credit card company $100.00 per month, the agency may get an 8% contribution from the creditor, which is $8.00 per month. Since the average creditor contribution has decreased from about 15% to 8% in recent years, credit counseling agencies can’t rely on these contributions alone.

I don’t know all of the ways other agencies are funded but CCCS is also funded by client fees, grants from agencies such as HUD, local charitable contributions and the United Way. Good credit counseling agencies try to help people repay their creditors while improving their personal financial situation. We must comply with certain creditor regulations but do truly look out for the best interests of our clients.

“Don’t they keep your first payment as your fee?” It depends. 

Some of the other agencies may keep your first payment as their fee. This is an important question to ask them since this can be a considerable amount of money. Most CCCS agencies do not collect their fees in this manner. Currently at my agency, we charge a $35.00 one-time set up fee if you sign up on the debt management program. The monthly fee ranges from $5.00 to $25.00 per month ($5.00 per creditor, not to exceed $25.00). We do not currently charge for financial counseling. Most other CCCS agencies nationwide have comparable fees.

Since you will trust your credit counseling agency with your most personal financial information, it is imperative that you feel comfortable with their company ethics. A good place to start is the Better Business Bureau (www.bbb.org). If the agency has outstanding complaints, you can find them at this website. You may also be able to check with your State Attorney General’s office to see if they have received any complaints about the business.

Another important thing to look for is whether the agency is accredited. Accreditation is a process where a third-party agency scrutinizes everything that the agency does to ensure that they are looking out for the best interest of the client. At CCCS we go through this process with COA (Council on Accreditation for Children and Family Services www.coanet.org). I can tell you that they check into everything imaginable and then some stuff I’ve never even thought of.  They have very strict guidelines that we must comply with in order to maintain our accreditation.

The National Foundation for Credit Counseling is also another good place to do some research. In order to maintain our membership with the NFCC, we also must meet strict compliance rules in order to keep the NFCC name in good standing. You can locate an NFCC agency near you at www.nfcc.org.

Even though there may be some agencies whose executives are just getting richer all the time, all credit counseling agencies are certainly not the same. Some of the larger agencies may truly want to help people so I’m not claiming that they are all bad.  However, I do believe that there is something to be said for the smaller, local, non-profit agencies.

Just because you may hear someone’s commercial every 30 seconds does not make them more trustworthy, only more free to spend a lot of money on advertising. Personally, I tend to be a little more comfortable trusting people with my money if I can go in and visit them face-to-face if there is a problem.  It’s always reassuring to be able to look your financial professional in the eye.

The best advice I can give is to do your homework. Make sure you feel comfortable with the agency you choose, no matter who that may be. Make sure that they are truly working to help you improve your situation instead of just making things worse. If you come away from the experience feeling in control and better educated about money then everyone wins.

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Copyright © 2003 by Jennifer Delcamp. All rights reserved.

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