Credit counseling can be a wise and beneficial move for better managing your finances. Not all credit counselors, however, are equally beneficial or even reputable. Picking the right credit counselor is, therefore, the first and foremost step to avoid being taken advantage of by a scammer.
To this end, knowing how to identify and avoid shady credit counselors is every bit as important as knowing how to choose from the reputable ones.
Credit counseling scams abound, often making lofty promises with no real guarantees of results. Scammers usually take measures you are perfectly capable of taking yourself. According to the Federal Trade Commission (FTC), a credit counselor must at least provide you with debt management, savings education and budget counseling. From there, different credit counselors may offer other useful services. Even profit-based credit counselors selling debt consolidation and debt management services can be beneficial, as long as you hire a reputable one.
Choose Accredited Nonprofit Organizations
Some credit counseling agencies are nonprofit organizations while others are for-profit. For-profit debt relief and debt settlement organizations charge you money for their services, often with no guarantee of results. Nonprofit credit counselors do not charge you for their services. However, results are not guaranteed by nonprofits either, but at least you are not paying for the uncertainty.
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Occasionally, non-profit credit counselors may charge a fee but never for an initial assessment, financial education and budgeting assistance. Plus, when you pay a nonprofit agency, at least you know the money is being folded back into the credit counseling services for others and not simply going into some person’s pocket.
Moreover, for-profit debt relief and debt settlement agencies often promote and sell various specific debt relief products and services, like debt consolidation loans. Nonprofit credit counseling agencies mostly provide only advice and do not promote or sell particular solutions over others. When they do provide services, those services are usually restricted to budgeting and assistance devising a debt management plan.
In addition to this delineation, some credit counselors are accredited by one or more industry oversight organizations. The safest choice of credit counselor you can make is opting for one both accredited and nonprofit. The two primary accrediting agencies for credit counselors are the Financial Counseling Association of America (FCAA) and the National Foundation for Credit Counseling (NFCC).
Get All Guarantees in Writing
Before you pay any credit counseling agency for services, make sure you know exactly what services you are receiving for the money and what guarantees are being made if any. Make sure you get this in writing in case you ever need to provide evidence of your agreement and the promises made by the counselor. If a credit counselor does not give you such a written statement confirming what you are buying, then do not buy it.
Beware of Common Credit Counseling Scam Red Flags
While there is an abundance of credit counseling scams out there, they all utilize the same tricks and rely on the same vulnerabilities to operate. Because of this, they can usually be identified by the same red flags. The following are some of the most common red flags for identifying the scammers lurking among all the legitimate credit counselors:
- Promises that seem too appealing to be accurate – Such as to “give you a clean slate”
- Promises so vague as to be meaningless – Such as to “quickly and easily reduce your debt”
- No file with the Better Business Bureau – Or a file with no complaints or just a few that seemed to be resolved favorably for the consumer
- Does not provide basic credit counseling services – A credit counselor must provide, at the very least, both advice and education as well as debt payment and consolidation services
- Fee without a contract – There must be a contract itemizing exactly what you are paying for if there is a fee
- As already mentioned, never pay a fee without a signed document linking the fee to a promised product or service. Also listed in this document must be a time-frame estimating how long it can take to fulfill these promises. The company’s name and business address must appear on the document.
- Up-front fees – Like fees upfront for credit counseling services
- You may have to pay a small monthly fee if you participate in a debt repayment program, the first payment occurring prior to the initiation of the plan. All other paid offerings, however, must only be charged after they are delivered. Be particularly skeptical of companies wanting to charge you high fees like monthly service fees that counter any savings you might reap from your reduced debt load. Never pay a fee, upfront or otherwise, for an initial credit counseling consultation.
When you do start working with a credit counselor to lower or eliminate your debt, make sure to confirm the purported results with your creditors. For example, if you take part in a debt repayment plan in which you pay a lump sum each month, then the credit counseling company then parses out to each of your creditors, contact those creditors to make sure they are actually receiving their payments.
Ask the Right Questions
When you meet with a counselor for your initial credit consultation, you have not yet committed to using the credit counselor’s services going forward. You are still checking the counselor or agency out to decide whether or not to move forward with this one instead of another. To help finalize the decision, ask certain key questions and listen closely to their answers, including:
- What do you offer free and for what would I have to pay?
- Will you help me come up with an overall financial plan in addition to helping me solve this specific credit concern?
- Do you have a license to provide these services in my state?
- How are your employees trained and compensated?
- How do you protect the confidentiality of my personal information?
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