Consumer credit was a relatively new phenomenon in the first half of the 20th century. Some retailers, including Western Union, oil companies, and department stores, had issued proprietary cards since the 1920s to serve a more mobile consumer as automobiles became common. In the 1930s, other retailers entered into agreements to accept those proprietary cards at their establishments as well, but the practice was still generally a local option.
It was the launch of the Diners Club card in 1949 by Frank McNamara, Ralph Schneider, and Matty Simmons that really started the credit card industry, and a flood of consumer bankruptcies soon followed. Just two years later the National Foundation of Credit Counseling (NFCC) was established to help combat the rapid rise in consumer debt.
The Origins of Credit Counseling Services
The NFCC was founded as a trade association that represented the industry’s interests to state and federal legislators. Then, as the rising number of bankruptcies created a public relations problem, the organization turned its attention to educating consumers on the proper use of credit with the goal of reducing the number and cost of bankruptcies.
The NFCC did not actively participate in the collection of debts or advise consumers on debt relief options. However, the first credit counseling agencies providing those services did emerge in the 1960s, and almost all were members of the NFCC. Consumers’ propensity for “instant gratification” fueled a credit boom that provided a growing customer base for credit counseling services, and national chains soon formed. Today, the NFCC has more than 800 credit counseling agencies with locations in all 50 states.
A second major organization, the Association of Independent Credit Counseling Agencies (AICCA), was formed in 1993 by companies that preferred to deliver credit counseling over the telephone. This was a deviation from the NFCC which advocated in-person counseling services only. The AICCA has grown to more than 170 locations and served more than 2,500,000 consumers in 2010 , whereas the NFCC assisted approximately 3,500,000 people. Members of both associations now assist clients online, over the telephone, and in person.
How Credit Counseling Agencies Work with the Creditors
Early credit counseling service providers focused on resolving consumer credit card debts under agreements with the card issuers that paid the agencies a “fair share” of the consumer payments secured. Historically, that share was 15%, but in recent years banks have lowered the amount they will pay to 4 to 10%. In addition, the credit counseling agency would charge the consumer a small management fee – usually no more than $50 a month.
In return, consumers are enrolled in a Debt Management Plan (DMP) administered by the agency. Per their working relationships with the major credit companies, the agency is able to offer the debtor an interest rate reduction – called the “concession rate” – and lower minimum payments on some debt agreements so the debtor’s total monthly payment is lower. The agency actually collects that total payment from the consumer and distributes it to the various creditors, keeping its fair share payment and the administrative fee. Typically, the DMP’s goal is for the consumer to pay off all outstanding debt within three to five years.
Consumer Credit Counseling Services Have Expanded
Today, many credit counseling agencies have expanded their service offering to better assist consumers with all facets of their financial situations. General financial education is provided my many agencies, including budgeting tips and referrals to other helpful resources. For consumers in a debt crisis, the agency can provide counsel on foreclosure prevention and on the bankruptcy process. Recently, agencies have begun to assist consumers looking to purchase a home with guidance on assessing the local real estate market and home values, and outlining the various available financing options and their requirements.
The industry has not grown without controversy. Consumer rights activists have long complained that the “fair share” arrangements create a conflict of interest for the credit counseling agencies. Because agencies were dependent on the credit companies for most of their operating income, activists felt they could not truly represent consumers’ best interests.
Not All Credit Counselors Are Created Equal
Most credit counseling agencies are non-profit organizations; however, the IRS has rejected applications for tax exempt status from about 30 of the largest agencies in the US (representing about half of the industry’s total revenues) based on their fee structures and employee compensation plans. Also, the Federal Trade Commission (FTC) has sued numerous credit counseling services over misleading practices, such as hidden fees and abusive payment plan agreements. In addition, the Better Business Bureau has had ongoing problems with credit counselors and annually receives thousands of consumer complaints.
In response, today’s credit counseling agencies have streamlined their service delivery and adjusted their business models to be more efficient and to provide transparency into their relationships with the credit card companies. However, the FTC, Better Business Bureau, and consumer rights activists still urge caution and due diligence when considering the services of a credit counseling service. When implemented properly by a legitimate agency, credit counseling can be a tremendously successful solution for consumers with unmanageable debt.