Choosing a Credit Counseling Agency

Find a good credit counseling agency to help resolve your credit troubles.

There are hundreds of organizations that provide credit counseling. Most of them are reputable services committed to helping consumers resolve their money troubles. However, some charge excessive fees, give questionable advice, and fail to perform the services they promise.

If you need credit counseling, how can you avoid the rip-off services and instead choose a legitimate, competent credit counseling agency that looks out for your best interest? To start, learn what a credit counseling agency can do for you. Then follow the tips below for finding and researching the legitimacy of credit counseling services.

What Is Credit Counseling?

For consumers having trouble paying their debts or simply making ends meet, a credit counseling service can provide information, guidance, and solutions. Credit counseling agency services include:

• money management education
• budget counseling
• debt counseling
• housing counseling (HUD-certified agencies), and
• referrals.

A big draw for credit counseling services is the debt management plan (DMP). As part of the plan, the agency negotiates lower interest rates and monthly payments with credit card companies and other creditors. Monthly payments are consolidated into a single payment that DMP participants make to the credit counseling service, which then disburses the funds to creditors as scheduled.

The cost of services varies from agency to agency and according to state law, but many organizations provide counseling at no or low cost. Though clients typically pay a monthly fee for participating in the debt management plan, the majority of agency funding comes from contributions from creditors who receive money owed them through the DMP. (Beware of services that promise to clean up your credit record for a fee. For more information, read Nolo's article Don't Use a Credit Repair Clinic.) 

How to Choose a Credit Counseling Agency

To make sure you get quality services from a credit counseling agency, choose wisely. Start by getting referrals from friends and family. Also, check the listings at the National Foundation for Credit Counseling (NFCC) at www.nfcc.org, and the Association of Independent Consumer Credit Counseling Agencies (AICCCA) at www.aiccca.org. Then, make sure the agency meets the following criteria:

Is an accredited nonprofit. At a minimum, any service you choose should be a registered nonprofit. But because some agencies have abused their nonprofit status, you should also be sure the service is accredited. Accreditation will most likely be by the Council on Accreditation (COA) or the International Organization for Standardization (ISO).

Is an NFCC or AICCCA member agency. Members of the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA) are held to strict quality, financial, and ethical standards.

Employs certified counselors. In addition to completing the agency's internal training program, credit counselors should be required to pass a certification exam that tests for understanding in areas such as counseling, budgeting, credit and consumer law, debt management, and bankruptcy. The exam should be administered by an independent agency such as the Association for Financial Counseling and Planning Education, the Center for Financial Certifications, the National Association of Certified Credit Counselors, the National Foundation for Credit Counseling, or another qualified organization. If you need counseling for housing issues, such as foreclosure prevention, choose an agency certified by the U.S. Department of Housing and Urban Development (HUD).

Provides substantive counseling and education. The counseling session, whether conducted in person, by phone, or via the Internet, should last approximately one hour and cover your entire financial situation, including income, expenses, debt, the reason for your current financial situation, and your goals. At the end of the session, you should receive a proposed budget plan, a list of next steps, and a presentation of your options. The counselor should provide, or at least offer, free educational materials, the opportunity to attend free money management workshops (if available in your area), and the option for follow-up counseling.

Provides more than one debt management option. Every counseling session should result in more options than just the debt management plan (DMP). Although a DMP can reduce monthly payments, fees, and interest rates for some participants, it is not appropriate for everyone. Beware of any counselor that recommends the DMP before completing a comprehensive counseling session, pushes the DMP as the only option for you, or reveals that he or she is compensated if you sign up for the DMP.

Charges reasonable or no fees. The agency should provide free counseling, or charge only a nominal fee. The fee to establish a DMP should be no more than about $50. The monthly fee for administering the DMP is typically a percentage of your monthly payment. The maximum should be around 10%, not to exceed $50, and the agency should be willing to waive your fees if you can't afford them.

These fees and the program guidelines should be put in writing. Beware of any organization that pressures you to make "voluntary" contributions or that only includes in the DMP those unsecured creditors that support the agency financially through "fair share" contributions.

Makes up-front disclosures about services, fees, and revenues. If the organization won't send you general information without first getting your personal and financial information, go elsewhere. In addition to disclosing fees, the agency should disclose its sources of revenue. It should also provide an estimate of how long it will take you to pay off your debts through the DMP, should you choose to participate. If that period exceeds 48 to 60 months, it may not be your best option. During your participation in the DMP, the agency should send you detailed statements (at least quarterly but preferably monthly) showing your payments, disbursements, and estimated balances.

Has a clean business record. Check with the Better Business Bureau and your local consumer protection agency for unresolved complaints against the credit counseling agency. (To find your local consumer protection agency, read Nolo's article State Consumer Protection Offices.) Also check with your state attorney general for complaints or legal actions against the organization. (You can find your state attorney general office at the National Association of Attorneys General's website, www.naag.org.) Ask your counselor what the company's complaint resolution process is. If the company doesn't have such a process, go elsewhere.

For more information on credit counseling services, getting your finances under control, and dealing with debt, get Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Robin Leonard and Margaret Reiter (Nolo).