Beware of Debtors: How to Avoid Dodgy Credit Counseling Services | Debt

Americans have a debt problem. In fact, total household debt hit a record $13.29 trillion during the second quarter of 2018, according to the Center for Microeconomic Data at the Federal Reserve Bank of New York. In addition, nearly 10% have a debt in collection.

Those who are overwhelmed with debt often turn to credit counseling agencies for help. They offer a variety of services, such as workshops, individual coaching, and debt management plans, all with a common goal. “The No. 1 goal is to leave people in better financial shape,” says Julie Kalkowski, executive director of the Financial Hope Collaborative at Creighton University. The Financial Hope Collaborative is a financial education and counseling program for low to moderate income families living in Omaha, Nebraska.

However, not all credit counseling agencies are created equal. While some are accredited nonprofits, others are for-profit companies that charge high fees and use questionable tactics, like asking customers to dispute legitimate debts on credit reports or pay for become an authorized user on a stranger’s credit card. Unscrupulous agencies can empty the wallets of already cash-strapped families and fail to address underlying issues such as budgeting, which are necessary to ensure lasting financial success.

“What gets people into trouble is they’re looking for a quick and easy fix,” says Drew Kellerman, founder of financial firm Phase 2 Wealth Advisors in Gig Harbor, Washington. “If it’s legit, it won’t be a silver bullet.”

Keep reading to learn more about what to expect from a good credit counseling agency and how to identify bad actors to avoid major missteps and avoid financial trouble.

Understand the basics of good credit counseling. Many nonprofit credit counseling agencies offer both free and paid services, Kalkowski says. They may offer free free consultations, financial literacy workshops, or even one-on-one budgeting sessions. However, if you sign up for a debt management plan, expect to pay for the service. Debt management plans through nonprofit organizations often have start-up costs of $30 to $40 and monthly fees of $20 to $40.

Most debt management plans require participants to send a monthly payment to the credit counseling agency. The agency then distributes it to the creditors. They also negotiate lower interest rates and may be able to have fees waived and can help reduce or eliminate the number of collection calls a person receives. Keep in mind that most plans take 36-60 months to complete. Credit counseling agencies can also help consumers review credit reports and challenge errors.

The services provided by credit counseling services are nothing that consumers cannot do on their own. “You could do it, but it’s a complex process,” says Kyle Winkfield, a partner at O’Dell, Winkfield, Roseman and Shipp finance firm in the District of Columbia. The advantage of using an agency is that they have experience negotiating debt repayments and disputing incorrect information on credit reports. Paying an expert to perform these tasks not only saves time, but can also minimize the stress of navigating unfamiliar territory. “If you find a good one, they’re worth more than they charge,” says Winkfield.

Beware of common red flags. While good credit counseling agencies are transparent about their fees and services, unscrupulous ones can be evasive and pushy. Red flags include demands for payment before services begin, failure to provide a contract, insistence on accessing your bank account, and promises of debt relief that sound too good to be true.

The Federal Credit Repair Agencies Act prohibits the collection of payments before services are rendered, and agencies must also be clear about the amount of money they will collect when administering a plan. debt management. “They have to tell you up front what your total cost will be,” Kellerman says.

Some companies use unethical practices to increase a person’s credit score. For example, some companies ask people to dispute all debts on their credit report, even accounts they know are legitimate. Since the debts are removed while the credit bureaus investigate, it may give a temporary boost to a person’s credit rating, but no long-term benefit. Some state laws, such as the Michigan Credit Services Protection Act, also make this practice illegal.

Another gray area is paying to become an authorized user on someone else’s credit card. Winkfield says he’s heard of people paying $1,500 a month for the service. Credit repair companies solicit people to “rent” their property credit score to others by adding authorized users to their credit cards. The credit repair agency gets a reduction in the monthly payment in exchange for putting the arrangement in place. The credit account will appear on an authorized user’s report and will be considered in an enhanced credit score. Known as piggybacking, this practice is not illegal, but may violate card issuers’ terms of service.

When evaluating the legitimacy of a credit reporting agency, Kalkowski cautions against placing too much reliance on the promises made by company representatives. “A lot of these people are so nice,” she says. They can pressure people to sign up immediately, if only for peace of mind. While they may seem caring, Kalkowski points out, “These people aren’t your friends. They’re here to make money.”

When and where to find help. Although credit counseling agencies can help people in a variety of financial situations, Kellerman says it’s best to seek help as soon as you may not be able to pay your bills. “It would be a good time, before things go wrong, to seek out a financial planner or a credit counseling agency,” he says.

Kalkowski recommends finding a nonprofit agency rather than a for-profit agency. Reputable companies can be accredited or certified by one of three organizations: the National Foundation for Credit Counselling, the Financial Counseling Association of America, or the Council on Accreditation. Consumers can also visit the Better Business Bureau for business ratings and reviews or discuss the matter with trusted friends and family members who may be able to make a recommendation.

Asking for help with debt can be difficult. Those in trouble may be hesitant to let others know, but Kalkowski says there should be no shame in reaching out for a lifeline if finances get out of hand. “There are a lot of Americans in this sinking boat,” she said. Rather than going it alone, use the resources available to keep your finances afloat.