Credit Counseling Problems

Credit counseling is usually a good thing when you have money management problems and are overwhelmed by bills -- but financial distress is no reason to sign up for services blindly. Most nonprofit counseling firms are legitimate and offer a wide spectrum of services to get you out of debt, but some are more focused on getting your money. Avoid those firms by watching out for warning signs and choosing a credit counselor who abides by proper industry practices.

Misleading Status

Many credit counseling firms tout their nonprofit status as a sign of legitimacy, but this is not always the case -- particularly if they are asking for large fees. Confirm nonprofit claims with your state's charity officials, the Better Business Bureau advises. The National Association of State Charity Officials lists contact information online for the appropriate officials. Ask counseling agencies how they are funded, as most of their money should come from creditors rather than client fees.

Limited Services

Legitimate credit counseling companies offer simple assistance, like seminars, online educational materials and budgeting help, and more in-depth services like set-up and administration of debt management plans. The Federal Trade Commission warns that some firms push you toward more profitable services, like structured plans, without properly evaluating your individual situation. You should receive thorough counseling and personalized recommendations.

Dissolution

Credit counseling firms can go out business, which complicates matters for you if you are in the middle of a debt management plan. Plans typically last several years, and your credit counselor is responsible for disbursing your monthly payments to your creditors. You can rack up delinquent payments on your credit reports if the firm shuts down and your payments do not get made. Stop any automatic deductions from your bank account if your counseling firm goes out of business, the Federal Trade Commission advises. Contact your creditors and ask if you can pay them directly under the terms of the plan.

High Fees

Credit counseling should be affordable because it is most needed by people with financial problems, -- you should not be turned away if you cannot pay for services. Some firms charge unreasonable fees and do not clearly disclose them. The FTC recommends asking for a written fee schedule and insisting on a contract when you agree to services with a counseling firm.

Considerations

The best credit counseling agencies are licensed, bonded and insured and follow certain practices, according to the 2004 Internal Revenue Service report "Credit Counseling Organizations" by Debra Cowen and Debra Kawecki. These firms have trained counselors, provide consumer education services and review clients' finances in detail to make the best recommendations. They disburse funds promptly to creditors for clients on debt management plans and handle consumer complaints promptly. Always check an agency's Better Business Bureau rating before contacting it for credit counseling services. The National Foundation for Credit Counseling and Association of Independent Consumer Credit Counseling Agencies both provide referrals.