Using A Credit Counseling Service

If you are seeking credit counseling services, the odds are that you are already in a financially precarious position - few people seek credit counseling before they are over their heads in debt, perhaps also being hounded by creditors.

When a credit counseling service promises an easy resolution to your credit woes, it can be tempting to believe everything they say - and a good credit counselor can provide a great deal of assistance. But you have to exercise care, or you can end up with a credit counseling service that will take advantage of you.


Who Benefits From Credit Counseling

People who will most benefit from the services of a credit counseling firm are typically unable to make minimum payments on their debts and are not able to pay all of their bills in a timely manner. Many are already being sent threatening letters from their creditors, or are being targeted by collection agencies.

Credit counselors assist with unsecured debts, such as personal loans and credit card debts, or bills for medical care. They typically do not work with secured loans, such as home mortgages or car loans, or with payments due for utility services or insurance bills. However they will consider your entire debt load when creating a budget and repayment plan. Also, if you are at risk of foreclosure or repossession, they may be able to assist you or advise you as to how to contact your lenders and obtain additional time for you to catch up on your late payments.

If a credit counseling service can negotiate your debts, create a budget to help you keep on top of your obligations, and provide any appropriate debt management services, you will probably benefit from working with an ethical service. But if your financial situation is beyond that type of management, you may need to consider bankruptcy.

What Services Are Provided?

A typical credit counseling service focuses first on assessing your financial situation, and next on negotiating better interest rates with your creditors and helping you establish a budget and payment plan. They then provide debt management services, with the client paying a monthly fee that is used to pay the client's debts and, assuming the counseling service's fees are not being paid by the client's creditors, the counseling service's fee for managing the debts.

Credit counseling services will typically attempt to renegotiate your debts to try to obtain lower interest rates or even voluntary reductions in the principal owed. If the credit counseling service offers a debt management program, as most do, clients who use those services will pay the counseling service a monthly fee that will be used to pay the client's debts, and the counseling service's fee for managing the debts.

Note that if a creditor is not included in a debt management plan, you will be responsible to continue to make payments to that creditor on your own. You should clarify with your credit counseling service that, if any, of your debts you must continue to pay yourself.

There is a significant difference between a credit counseling service and a lender providing debt consolidation loans, or a service that promises to "repair" or renegotiate your credit without providing any counseling or support. A company that promises to resolve your debts "for pennies on the dollar" is not a "credit counseling service" as that term is generally understood - and no respectable credit counseling service would make such a claim. Many such debt settlement services are fly-by-night operations that charge significant fees, and that may disappear with your money without having actually performed any services on your behalf.

Fees and Commissions

Credit counseling services obtain fees in two manners. First, they may charge the consumer a fee for the counseling service. Second, as they negotiate a payment structure with your creditors, they may receive a fee or rebate from the creditors.

Warning Signs of a Questionable Service

The following signs suggest that you may have contacted a service more interested in profiting from your situation than in helping you resolve your credit problems:

  • Excessive Fees: Watch out for services that require large up-front fees or offer their employees high monthly commissions, as they may be more focused on their own profit than in helping you manage your debts.

  • Overpromising: Watch out for promises that sound too good to be true. For example, a service that promises you that you will pay only pennies on the dollar is likely to be making a promise that it cannot deliver. Be highly skeptical of promises that negotiated reductions of your debt that are reached your creditor will not affect your credit rating.

  • Late or Missed Payments: As long as you are current with your payments to the company, a credit counseling service that is providing debt management services should make timely payments to all of your creditors.

Play it safe by seeking credit counseling and debt management services accredited through the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling. It is far less likely that an accredited organization will charge excessive fees or try to take advantage of you, than it is for an organization that is not accredited.

Copyright © 2004 Aaron Larson, All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. If you use a quotation, excerpt or paraphrase of this article, except as otherwise authorized in writing by the author of the article you must cite this article as a source for your work and include a link back to the original article from any online materials that incorporate or are derived from the content of this article.

This article was last reviewed or amended on May 8, 2018.