Consumers mired in debt need advice that goes beyond the obvious. A credit counseling service that offers a sound strategy, reasonable fees and immediate action will help an indebted consumer solve their debt problems. However, the consumer must be firmly engaged in the process from the very beginning, starting with their selection of a credit counseling company. To select a credit counseling company wisely, consumers need to ask a few hard questions to each and every company they are considering.
Questions to Ask Credit Counseling Companies
What is your fee structure?
A good credit counseling company will offer a reasonable fee structure that does not leave the consumer even further behind on other bills. Recent rules mandated by the FTC now prohibit advance fees for credit counseling, which until recently was a common practice among some of the less scrupulous providers.
Look carefully at the credit counseling service’s fee structure. As part of the program, the service provider may require you to establish a separate account administered by a third party. While this is a sound practice if done correctly, the FTC notes that the provider is responsible for using that account to make payments to your creditors on your behalf, and that they may assess a “reasonable fee” for administering the account.
What assurances do you offer?
Asking about a credit counseling service’s assurances is a bit of a trick question. A good credit counseling company will not make outright guarantees. On the other hand, the provider can certainly collect metrics on past performance and offer statistics, such as average success rate and how long it typically takes to pay off a certain amount of debt.
While the credit counseling service may have an excellent success rate of negotiating reduced settlements, the ultimate decision still rests with the creditor—the credit counseling company cannot force a creditor to do anything, and therefore cannot legitimately offer a guarantee of success.
How do you manage my dedicated account?
It is standard practice for a credit counseling service to establish a dedicated account for you to hold money that is used for fees to the service provider and payments to creditors. But how is that account managed and where is it located?
FTC rules now require that these accounts be maintained at an insured financial institution that is not affiliated with the company administering the account. Furthermore, the dedicated account must remain the property of the consumer, who may withdraw funds at any time without penalty.
What are the qualifications of your credit counselors?
Are the credit counselors that are employed by the service provider trained and accredited? Or are they commission-based salespeople – or worse, minimum-wage hacks? Your state may have specific guidelines as to which certifying agencies are authorized or recommended. Some examples of common, third-party certification agencies are the Association for Financial Counseling and Planning Education (www.afcpe.org), the National Association of Certified Credit Counselors (www.naccc.us), and the National Foundation for Credit Counseling (www.nfcc.org). The Department of Justice maintains a list of approved credit counseling agencies at www.usdoj.gov/ust.
What services do you offer?
The services of some credit counseling companies go far beyond negotiating and settling debts. A good credit counseling company will also address the root cause of the debt problem, offering consumers debt management classes, budget counseling and other services. Ideally, a credit counseling service will offer two different classes of service: Services that negotiate debt with creditors to solve the immediate problem, and services which help the consumer develop a long-term plan to avoid similar problems from occurring in the future.
What are the terms of your contract?
First of all, make sure that the credit counseling service does offer a written, signed contract. According to the Credit Repair Organizations Act, a credit counseling contract must:
- Specify the terms and conditions of payment to the credit repair organization.
- Contain a detailed description of services to be performed, including any guarantees of performance, and an estimated time required for the services to be completed.
- Include the full legal name and principal address of the credit repair business.
- Include a cancellation clause, giving you the right to cancel the contract without penalty within three days.
The Credit Repair Organizations Act does not apply to non-profit (IRC 501 C3) organizations however, so beware of sketchy claims of non-profit status, which are often used as little more than a means of getting around the law. For this purpose, the for-profit credit counseling agency might be a better option, because it falls under the purview of this law.
Verbal promises are worthless—don’t rely on them to make your decision. If a verbal promise is made, ask the company to provide it in writing. Any credit counseling company that balks is one you will want to avoid.
Get additional information on how credit counselors help consumers take control of their finances with valuable, professional advice on budgeting, paying off debts and more.