Avoiding Scammers

While there are many reputable credit counseling services, there are also a lot of people who prey on consumers with financial difficulties.

Here are a few tips that will help you tell the good guys from the bad guys.

Good Signs:

• The credit counseling agency sends you free information, no questions asked.
• The company offers free educational materials.
• The company is willing to help you, even if you can’t afford to pay.
• Counselors work on salary.
• The counselors are certified, preferably by an outside organization.
• The counselors will negotiate with creditors to get you the best possible terms and credit reporting options.

Bad Signs:

• The company wants you to provide details about your situation before sending you information.
• The company charges for everything.
• Counselors get paid more if you sign up for a certain service, or if you pay a fee or make a contribution to the organization.
• The counselors have not gone through a certification process.
• The counselors say they will make sure negative (but accurate) items are removed from your credit report.

Once you locate potential counseling agencies, you should contact your state Attorney General, local consumer protection agency and the Better Business Bureau to find out if there have been any complaints against the companies you’re considering.

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

• 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.)
• Do you offer information? Are educational materials available for free?
• 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 setup and/or monthly fees? (Get a specific price quote in writing. Plans with monthly fees can be expensive over time.)
• 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.)
• Will I have a formal written agreement or contract with you? (Don’t sign anything without reading it first.)
• 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?
• What assurance do I have that information about me—including my address 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?

You can work with a credit counselor in person, on-line or by phone—but face-to-face meetings are usually most effective.

You should bring as much information as possible to your first meeting, including current bills, copies of your credit reports and the files from any negotiations you’ve already started. The agency should tell you specifically what to bring.

During the meeting, the credit counselor should:

• review your financial history;
• talk about the problems you’re dealing with right now; and
• communicate with you in a non-judgmental way.

The next step is for the counselor to set up a plan to help you become debt-free.

Don’t expect this to happen overnight. It usually takes three to five years to become debt-free, even working with a credit counseling service.

In some cases, credit counselors may simply help you set up a budget and a pay plan to get your credit back in shape. Or they may recommend a debt repayment (or management) plan.

A debt repayment plan is designed for people who cannot manage all the monthly payments for their current debt load. The credit counseling service negotiates with each (or at least most) of your creditors. You then make one payment each month to the credit counseling agency. And the agency distributes the money to your creditors.

To participate in some debt repayment plans, you will have to agree that you will not apply for or use any additional credit until the plan has ended.

The benefits of participating in a debt repayment plan can include reduced or waived finance charges and fewer collection calls. However, the degree to which a plan can help or hurt you—and your credit—varies dramatically.

How is it that some debt repayment plans help your credit rating, while others trash it? It all depends on the deal the credit counseling agency negotiates on your behalf.

As part of your debt repayment plan, the credit counseling agency should be able to:

• arrange a more favorable repayment schedule with your creditors;
• lower the interest rate on your credit cards;
• get each creditor to stop charging late fees; and
• get each creditor to re-age your account, so the account now shows up on your credit report as current.

In some cases, you will have to be on the plan for a certain period of time for benefits to show. According to the FTC:

Some creditors require a payment to the credit counselor before accepting you into a DMP. If a credit counselor tells you this is so, call your creditors to verify this information before you send money to the credit counseling agency.

Also, confirm with your creditors that they have accepted the proposed debt repayment plan before you sign the contract and start making payments to the credit counseling agency.

And confirm with the agency that your bills will all be paid before their due dates.

You also need to be very clear about which creditors are—and are not—included in the plan. It’s possible that some of your creditors will refuse to participate, in which case you’ll have to continue paying them directly.

You need to review your monthly statements from each of your creditors, too, to be sure they are receiving payments according to the terms of your repayment plan. You should verify that:

• payment was received on time;
• the interest rate has been lowered, as negotiated; and
• finance charges and late fees are as negotiated (preferably waived).

A well-negotiated debt repayment plan should help to improve your credit history moving forward. If you uphold your part of the plan, you will be proving to future potential creditors that you can pay on time, every time—a quality that lenders prize.

However, a debt repayment plan will not erase any negative history already on your credit report, such as a history of late or missed payments. This information still will remain on your credit reports for up to seven years.

Some creditors also may report your accounts as being in financial counseling, or being handled through a debt repayment program. This is less favorable for your credit rating, so press your credit counselor to ask for a better credit reporting option, whenever possible.

Debt repayment plans usually cover only unsecured debt; they don’t include home loans, auto loans and other types of secured debt. You’ll need to continue making payments to these creditors directly.

Next: Debt Consolidation