The Truth About Credit Counseling Services

Many people these days turn to credit counseling agencies for help with their snowballing debt. But is it a good idea or just another consumer scam?

Liz Pulliam Weston at MSN Money analyzes this topic. "The best credit counseling can help people who are behind on their debts get back on their feet. Fly-by-night outfits can disappear with your money, and what remains of your credit rating. In between the two are a whole new fleet of operators who may or may not leave you better off that you are now."

Where did credit counseling come from? "A decade ago the industry was dominated by the National Foundation for Credit Counseling, whose nonprofit affiliates -- usually known as Consumer Credit Counseling Services -- negotiated lower interest rates and payment plans for people who had fallen behind. Today you can find the Consumer Credit Counseling Service in just about any city."

"But the services now have plenty of competition. A rise in consumer debt in the 1990s helped spawn hundreds of rivals, many with million-dollar advertising budgets, slick Internet come-ons and sound-alike names. Some do a good job of negotiating repayment plans. Others charge fat upfront fees, pay their executives even fatter salaries and pocket much of the money that could be going to pay off creditors. An increasing number target people who aren't even late on their payments, but who are simply disgruntled about their interest rates. The worst aren't credit counselors at all. Usually billing themselves as specialists in 'debt settlement,' they promise to help you get rid of your debts for pennies on the dollar -- after you pay an upfront fee that can be $3,000 or more."

So who needs credit counseling? "Let's make this clear: If you're able to pay your bills and are current on all of your accounts you almost certainly don't need credit counseling. Here's when you might think about full-scale credit counseling:

-You can't pay the minimums on your credit cards
-You're consistently late paying one or more of your regular bills
-You're being hounded by creditors and collection agencies
-Your efforts to work out reasonable repayment plans with your creditors have failed

What to watch out for: Once you've decided you want credit counseling, you should investigate the company or service carefully before signing up. Red flags to avoid include:

-Big upfront fees. Consumer Credit Counseling Services typically charge a $10 set-up fee. If you're paying a lot more, you may be the one who's getting set up, unless you're getting extensive and personal money coaching that could justify the fee.
-No accreditation. Legitimate credit counseling firms are affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.
-Delayed or missing payments. Some companies pocket your first month's payments as a fee, rather than passing the money on to your creditors. Missing payments can hurt your credit rating. Find out how much of each monthly payment is going to your creditors, and when it will be sent to them.
-Unrealistic promises. Some companies falsely promise that you can settle your debts for little or no money, without hurting your credit rating. Legitimate credit counseling services help you pay back what you owe, albeit at lower interest rates, and acknowledge there may be some affect on your credit rating and the ability to obtain new credit."

What will credit counseling do to my credit scores and will it limit my ability to borrow? The truth here is that counseling services will not harm your credit scores per se. However, accounts that are managed by counseling services may be noted as such on your credit report. Some lenders, including mortgage companies, will not allow you to qualify for credit while you are still enrolled in the program.