Credit counseling agencies can often help their clients get out of debt faster than they would without any assistance. However, some agencies don’t always have their client’s best interests in mind. Your financial future could depend on you asking the right questions first in order to make an informed decision.
Checklist: How to Choose a Credit Counseling Agency:
Choosing a credit counseling agency is a big step, and proof that you’re serious about wanting to change your life for the better. Therefore, you want to make sure that the agency you choose truly has your best interest at heart.
The first thing you will find in your search is that not all credit counseling agencies are created equal. In fact, as detailed in an April 2003 report by the Consumer Federation of America and the National Consumer Law Center, there are some credit counseling agencies that end up doing more harm than good. The old adage is true – if it seems too good to be true, IT PROBABLY IS.
At a minimum, you should look for a non-profit, experienced credit counselor who can provide personalized service coupled with sound financial education to ensure a long term solution to debt. Here is a list of some of the more important items to help you on your way:
Ask what industry association they belong to -The credit counseling agency should be a member of AICCCA or NFCC, industry associations that require very high standards for their members. If they don’t belong, they probably can’t meet the standards.
Ask if they are accredited and by who – The credit counseling agency should have ISO accreditation or COA (Council on Accreditation) which means the agency has successfully completed independent audits to ensure that they are complying with industry standards. If the credit counseling agency is a member of AICCCA or NFCC, they must have one of these accreditations.
Ask if the credit counselors are certified and by who – Credit counselors should be certified by an independent certification body. Then you can be sure that they have a good knowledge of the subject matter. The AICCCA uses AFCPE certification (Association for Financial Counseling and Planning Education) and the NFCC certifies their own counselors.
Ask if they are licensed in your state – Unless your state does not require a license (you can check with your state government) they must be have a current license and must comply with the regulations of your state.
Check with the local Better Business Bureau – The credit counseling agency will probably have either a good or bad record with the BBB in their home state as well as in your state. Make sure there isn’t a pattern of complaints against the agency.
Ask about all of the fees or contributions you will be asked to pay – Whether they are fees or contributions, they should be disclosed and should be reasonable (Anything significantly higher than a $50 initial consultation fee and $40 monthly fee or contribution would not be reasonable to me. Many states regulate the maximum that can be charged. Ask if your state is one of those. By all means – Make sure that the agency is not planning to keep your entire first months payment as their fee. This is a known bad practice in the industry and has been the source of state attorney general lawsuits as well as many individual actions against those agencies.
Find out what to expect in the credit counseling process – In the first place, did they ask you about your particular situation and tell you about some options or did they start “selling” you a solution, such as a debt management plan without knowing anything about you? Will a credit counselor help you prepare a spending plan or budget? Who will you be speaking to after the initial enrollment?
Make sure the credit counselor will not receive a bonus for enrolling you on a program -Once again, the AICCCA and NFCC do not allow their members to follow this questionable practice.
What type of ongoing educational services will you receive? – The better credit counseling agencies will provide monthly newsletters, website articles and training programs for you to take advantage of.various educational programs to help you read and understand your credit report as well as other personal finance subjects. As part of the non-profit mission of credit counseling agencies, this education should be provided to you for free.
If you enroll in a debt management plan – Make sure you will be out of debt within 5 years. This is the law. Also make sure you will get monthly statements from the agency showing your progress.
Ask how long they will hold your money before paying your creditors - There is no reason for the credit counseling agency to hold your check or money order any longer than a few days to ensure that it will clear the bank. Electronic payments can really help get your payments to your creditors faster. Ask about this option.
Ask if your money will be held in a separate Trust account – This will ensure that the credit counseling agency can’t use your money for anything other than paying your creditors. Again, some states actually require this.
Ask for a copy of any contract so you can review it before you sign it.
The credit counseling contract should include:
- Disclosure of the amount of your fee or contribution
- Description of the services to be provided
- An estimate of the payoff schedule for the debts
- Disclosure of the termination provisions of the agreement
- Options for resolution of disputes
The next two questions may be a little harder to get answers to, but they are very important.
Ask if any of the important functions of the credit counseling agency are “for-profit” – Some of the bad practices in the industry center around the use of related, for-profit companies that either perform payment processing, real estate leasing or software maintenance for the agency. This is usually coupled with high fees because it allows the owners of those companies to be paid salaries and other compensation from both companies.
Ask about the agency’s board members – There should be more than 2 or 3 and they should be independent, meaning they are not also employees of the business. That way, you can be more assured that the agency is following ethical business practices. Again, the AICCCA and NFCC have high standards for dealing with this issue.
There are also some advertising red flags consumers should look for when searching for an agency:
- Offers of unrealistic low monthly payments, money back offers and loan programs.
- Aggressive sales tactics, such as internet spam or unsolicited phone calls to your home or office.
- Saying you can do everything online, without ever speaking to a credit counselor. An initial application over e-mail or the internet may be okay as long as it is followed up by a comprehensive counseling session.
- Using the phrase “debt consolidation” or “loan.” Many disreputable organizations try to mask themselves as non-profit credit counseling agencies.
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