Avoiding Credit Couseling Scams

Beware of Scammers

In 2004, seven million people sought assistance from a credit counseling organization. Over the decades, credit counseling agencies grew in size and in number to meet the increased demand for their services, and in particular the increased demand for the tangible assistance of a debt management plan.

While there are many reputable credit counseling services, some credit counseling organizations prey on the vulnerability of the clients they are supposed to be helping. A growing number of people have complaints about troubling practices, including possible deception about the services offered, poor administration of DMPs, and undisclosed fees associated with DMPs.

Recent abuses by so-called non-profit credit counseling agencies have raised serious questions about the quality and legitimacy of credit counseling services.

Common problems

Key problems noted by consumer advoates include:

Deceptive and Misleading Practices. Consumer complaints and government investigations have focused on agencies that do not pay consumers’ DMP payments on time, that deceptively claim that fees are voluntary, and that do not adequately disclose fees to potential clients.
Excessive Costs. Some CCAs may charge substantial fees (sometimes denominated as "donations" or "voluntary contributions") that they hide from consumers.
Abuse of Non-Profit Status. “Non-profit” credit counseling agencies are increasingly performing like profit-making enterprises. Nearly every agency in the industry has non-profit, tax-exempt status. Nevertheless, many of these agencies function as virtual for-profit businesses, aggressively advertising and selling DMPs
and a range of related services.

What to ask before choosing a credit counselor

The FTC offers the following suggested questions to use when you interview potential counselors:

What services do you offer? Look for an organization that offers a range of services, including budget counseling, and savings and debt management classes. Avoid organizations that push a debt management plan (DMP) as your only option before they spend a significant amount of time analyzing your financial situation.
Do you offer information? Are educational materials available for free? Avoid organizations that charge for information.
In addition to helping me solve my immediate problem, will you help me develop a plan for avoiding problems in the future?
What are your fees? Are there set-up and/or monthly fees? Get a specific price quote in writing.
What if I can’t afford to pay your fees or make contributions? If an organization won’t help you because you can’t afford to pay, look elsewhere for help.
Will I have a formal written agreement or contract with you? Don’t sign anything without reading it first. Make sure all verbal promises are in writing.
Are you licensed to offer your services in my state?
What are the qualifications of your counselors? Are they accredited or certified by an outside organization? If so, by whom? If not, how are they trained? Try to use an organization whose counselors are trained by a non-affiliated party.
What assurance do I have that information about me (including my address, phone number, and financial information) will be kept confidential and secure?
How are your employees compensated? Are they paid more if I sign up for certain services, if I pay a fee, or if I make a contribution to your organization? If the answer is yes, consider it a red flag and go elsewhere for help.