Avoid Getting Ripped Off by a Credit Counseling Agency
When you find yourself in the position of needing credit counseling, there are dozens of agencies out there offering their services. Credit counselors can provide you with an analysis of your financial situation, information on how to create and use a budget, they can work with your creditors for lower interest rates, or they can help you consolidate your debt into one payment per month.
However, as in any business, there are credit counseling scams. These businesses often look legitimate, and may even have good reviews, but there are certain things to watch out for when you are choosing a credit counselor. A recent study found that major problems with credit counseling scammers include deceptive practices, excessive costs, no options other than debt management plans, and hard selling techniques.
If you have never been to a credit counselor, or you don’t know anyone who can recommend a legitimate credit counseling agency, there are certain industry standards that credit counseling agencies must adhere to. The Federal Department of Justice website offers consumers a list of reputable credit counseling agencies across the country. This is one way to ensure that you are getting a good agency.
Unfortunately, these standards are rarely enforced, and agencies are rarely investigated. It falls to the consumer to watch out for these deceptive practices. The Consumer Financial Protection Bureau offers the following advice to avoid scam credit counselors:
Pressures you to pay up-front fees. Any time an agency wants you to pay before it provides any services, beware. Make sure you are working with a non-profit credit counseling agency rather than a credit repair company or debt management company as those organizations tend to charge much more for their services and often ask for fees up-front.
Promises to take negative information off your credit report. This is a lie – no other way to say it! No credit counseling agency has the ability to remove any information from your credit report.
Asks you to dispute accurate information in your credit report. If a company advises you to dispute both accurate and inaccurate information in your credit report, you could be heading for trouble.
The company won’t explain your rights to you.
A scam company doesn’t want you to know that you can dispute errors in your credit report on your own under the Fair Credit Reporting Act; you don’t have to pay a credit repair organization to do it. They also won’t tell you that if you just signed up for a credit repair service, “you have the right to cancel your contract with any credit repair organization for any reason within three business days at no charge to you.”
Tells you to not contact credit reporting agencies like Equifax. You are legally allowed to contact any of the nationwide credit reporting companies directly.
Credit repair companies, debt management services, and credit counseling agencies are all subject to federal law, including the Credit Repair Organizations Act and often the Telemarketing Sales Rule, both of which forbid using deceptive practices or requiring up-front fees. Such up-front fees can be exorbitant in nature.
In general, if the set-up fee for a debt management plan (aka debt consolidation) is greater than $50 and monthly fees are more than $25, go somewhere else. If your contact at the agency is vague or reluctant to discuss specific fees, thank them for their time and move on.
Some agencies may publicly say that their fees are voluntary, but don’t pass this information on to clients. Others may tell you that their fees are voluntary, but will pressure you to pay the full fee, even when you really can’t afford it. Ask all agencies you make contact with if their fees are voluntary.
Reputable agencies will happily disclose that their fees are voluntary. While you may feel like you should pay a fee for their services, it is not legally necessary. Some agencies will offer a sliding scale for fees based on your income to debt ratio. However, a genuine non-profit credit counselor doesn’t need your fees to stay in business. If you truly cannot afford the fees, do not let a counselor or sales rep talk you into it. Nor should you let them rope you into consolidation loans before working with you on proper budgeting and a repayment plan you can do on your own.
Debt Management Program (DMP) Only
Many companies may proffer themselves as credit counselors when all they really want to do is set up a debt management program so they can earn fees. But, there are several disadvantages to such plans, according to financial guru Dave Ramsey:
1. Expect to Work with a Middleman
If you choose to enroll in a DMP, the credit counseling agency serves as a middleman between you and your creditors. Their job is to negotiate lower interest rates and find competitive repayment plans for you. But what they don’t want you to know is that you are perfectly capable and legally able to pick up the phone and make those calls on your own.
2. Beware of Hidden, Up-Front and Monthly Maintenance Fees
Unfortunately for people looking for help, most for-profit credit counseling agencies charge up-front fees just to sign you up. And on top of that, they charge monthly maintenance fees just for taking care of your business. So, you may be sending lower monthly payments to your creditors, but you could be losing money by hidden fees your new “business partner” might not reveal to you. Before you sign any contract for services, read every word of the contract.
3. Expect Fewer Breaks
Unfortunately, if you miss even one payment, you could sabotage the progress you’ve made toward paying down your debts because everything is rolled into a debt management plan. Your credit score could also drop. You have to decide if that is worth the risk.
4. Have Less Control of Your Finances
DMPs put someone else in control of your finances. Perhaps the most dangerous thing about DMPs is something people don’t think about: DMPs don’t help you to change your spending behavior. DMPs do not help people rethink their finances, figure out how to budget, or discourage further spending.
5. Debt Settlement
Debt settlement is when you negotiate with your creditors to pay them less than what you owe. But debt settlement is a very long process, and it can end up costing you more. Some companies charges fees as high as 15–25% of the total debt you’re settling. So, if you owe $20,000 in debt, that means you will pay an additional $3,000 to $5,000 in a debt settlement strategy!
6. Debt consolidation
This can seem like a good idea at first. Having one loan versus a handful of loans seems like a logical solution. But, when you consolidate your debt, you are taking on a refinanced loan with prolonged repayment terms. Oftentimes, debt consolidation loans are secured against assets, like your home or vehicles. That means, if you default on the loan, you could lose your house or cars.
Many debt management plans will eventually end up as debt consolidation because the agency counselors are trained in hard selling techniques.
The Hard Sell
It’s common in every business that involves sales to come across the technique called the hard sell. This is when a sales professional badgers the consumer until the consumer gives in to whatever the sales professional is selling.
You may be thinking, “That sounds unethical.” It is, to an extent. Sales pros who use this technique are not necessarily lying or using bait and switch; they are simply being relentless in pushing their products.
If you are working with a truly, genuine credit counseling service, you should never encounter the hard sell. A hard sell is designed to get a consumer to purchase services in the short-term, rather than evaluate options and potentially wait on making a decision. It is considered a high-pressure, aggressive technique.
Most often, the hard sell plays off the fears of the consumer. In pushing a debt management plan or consolidation loan, counselors will get the client to fear bankruptcy as their “only option” outside of DMPs or consolidating debt. These hard sellers also paint a picture of bankruptcy that makes consumers fear for their future credit. The smart consumer needs to look for the signs of being ripped off by unethical counseling agencies.
Steps to Take to Avoid Rip Offs
There are multiple steps you can take to avoid being ripped off by a shady credit counseling company. As with anything else, do your research before deciding on a credit counseling agency to work with.
Take the time to shop around. Check out reviews online, for instance on Google or Yelp. Ask friends and family for referrals. Avoid being sucked in by exaggerated and even untrue advertising. Call your local Better Business Bureau and the Consumer Protection Office of your state Attorney General’s office to avoid agencies that carry multiple complaints. It’s in your best interest to visit an agency to ask your questions prior to considering giving them your information or signing any contracts.
Look for a variety of services. Make sure that any agency you choose will offer multiple counseling options, not just debt management plans or loan consolidation. The more options an agency offers, the more likely they can help you find the best option.
Check out all costs. Find out what each agency charges to set up your service and for a monthly fee. Remember to ask if fees are voluntary and if they offer a sliding scale for those in dire circumstances. Get a written quote before signing any contract.
Non-profit status does not guarantee quality. Non-profit status does not ensure reasonable fees. Even though most credit counseling agencies are non-profit, that doesn’t mean that they don’t take advantage of consumers.
Demand good customer service. Ask about how the employees are trained. Have they been properly certified as credit counselors? Does the agency provide assistance after you enroll, such as one-on-one counseling? Any agency worth using will not pressure you into any program.
Ask about privacy. Ensure that the agency does not sell or distribute your information without permission. No reputable agency will sell your financial information.
Find out about employee compensation. There is nothing wrong with asking employees directly if they get commissions if they sign you up for a consolidation loan or debt management plan. Go elsewhere if they say yes.
Get the specifics on credit concessions. Find out if the agency deals with all of your unsecured creditors, not just those the agency has an agreement with. Get the numbers - exactly how much lower will your monthly credit card balance be and how long will it take to pay off your debt.
Keep an eye on the agency after you sign up. Keep paying your bills until any repayment plan has been approved by your creditors. Make sure that the proposed payment schedule lets your debts be paid prior to their monthly due dates. Call your creditors the first month to verify they have been paid on time by the credit counseling agency.
How will credit counseling affect your credit report. Your creditors may disclose to credit reporting agencies (Equifax, TransUnion, Experian) whether or not you are participating in a debt management plan; however, this doesn’t necessarily have a negative effect on your future creditworthiness. However, new creditors may consider your participation as a negative factor if you apply for credit after you start the plan. It should be noted that your credit has already been negatively affected if you have reached the point of needing credit counseling.
If you hope to avoid being taken advantage of, do your research, keep track of your payments, and figure out what you can do on your own before reaching out to a credit counseling organization.
While there are most definitely reputable agencies out there with only your best interests in mind, there are also agencies that have hidden fees and are only interested in getting your business so they can make money. Take the steps outlined to find a reputable agency and truly get your debt under control.
- Ultimate Guide to Credit Counseling, The First Bankruptcy Course
- How Credit Counseling and Debt Management Plans Really Work
- Pre-Bankruptcy Credit Counseling Requirement
- Credit Counseling Pre-Filing Briefing and Other Information Required to File Bankruptcy
- Credit Counseling vs Chapter 13
- Credit Counseling vs Credit Repair
- Credit Counseling vs Debt Management
- Avoid Getting Ripped Off by a Credit Counseling Agency
- Bankruptcy Alternatives and Their Success Rates
- Ultimate Overview of Bankruptcy - Difference Between Chapter 7 and Chapter 13
- Divorces, Finances, and Bankruptcy
- Bankruptcy Stigma Is Not What You Think
- How To Hire A Bankruptcy Attorney
- Famous People Who Have Filed For Bankruptcy
- Keeping your Property in Bankruptcy
- Should I File Bankruptcy?
- Coronavirus COVID-19 and Bankruptcy