“non-profit” status doesn’t guarantee that services are free, affordable, or even legitimate.

Non-Profit Credit Counseling

Credit Counseling, also known as consumer credit counseling, debt management, or one of various other terms can be invaluable help to some people who are in the “minimum payment" plan to  lower their monthly payments and reduce the time frame in which they will pay their debts back. There are however many things to understand about credit counseling before deciding to take this route.

In a credit counseling plan, a person will make one monthly payment to the credit counseling company. The credit  counseling company will attempt to negotiate the interest rates and  payback time (usually 5 years or less) for the consumer to repay their debts. The consumer would then be repaying the full balances that are owed, as well as the interest. Some credit counseling companies charge a fee for their services, while others that are classified as nonprofit do not. This use of the term nonprofit does not necessarily mean that there is no cost to the consumer, but that the business makes its money elsewhere. This is the controversy — most of these credit counseling companies receive their profits from the credit card companies themselves! Don’t be fooled by the use of the word nonprofit and become one of the many who assume that it makes a company a good one.

           Additionally, many credit counselors may say that their program isn't bad for your credit. This is a another hugely controversial claim, because when you enroll with them they become obligated to report to the credit bureaus that you are now in a debt management program. While this doesn't affect your FICO score directly, it does affect your overall credit worthiness. Although credit card companies may issue credit cards to people with relatively low scores, a  mortgage broker or car lender typically will scrutinize the entire credit report more extensively to verify employment and income information. Some lenders view a prospective customer's participation in a debt management plan as indicative of the customer being unfit to manage their finances, which may cause them to then throw out the entire credit application.
          While credit counseling may be a good option for some, it is very  important that before you sign up with any company that you fully understand your other options. When you have settled on the right path and are ready to determine the right company in that path, be sure to investigate them thoroughly and verify that they have a good standing with few complaints to the Better Business Bureau. Many credit counseling companies have high numbers of complaints with the BBB, and for many different reasons.

Questions to Ask

Here are some questions to ask to help you find the best counselor for you.

  • 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 paid? 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.