What You Need to Know about Credit Counseling

Don't choose a credit counseling agency until you've read these must-know facts. Learn what to watch out for with credit counseling and how it can impact your credit score.

Credit Counseling Agency Red Flags

Not all credit counseling agencies are reputable, trustworthy organizations. You need to research your prospective credit counseling agency thoroughly before you sign up for the service. Make sure you watch out for these red flags:

• No credentials. Your credit counseling agency should be accredited. Most reputable organizations are associated with the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling.
• Claims that are too good to be true. Unscrupulous credit counseling agencies will promise to talk your creditors into accepting little or no money to settle your debts. They may also promise that their services will not have a negative impact on your credit. Such claims are generally false, and you should avoid agencies that make these outlandish promises.
• Large up-front costs. Be wary of a credit counseling agency that charges large up-front fees. Your set-up fees will be minimal with a legitimate agency.
• Retaining monthly payments. If a credit counseling company wants to retain your first few monthly payments to pay their fees instead of sending them to your creditors, look for another agency. Skipping payments will hurt your credit score. Make sure you ask your agency exactly how much of your monthly payment will go to your creditors and when it will be passed on to them.

Counseling & Your Credit Score

With credit counseling, the rumors and claims tend to fall at either extreme of the spectrum. On the one hand, you may have heard from a credit counseling agency that they can get you out of debt without harming your credit score at all. On the other hand, you may have heard a rumor that credit counseling can ravage your credit report as badly as bankruptcy. In reality, neither claim is entirely accurate. Credit counseling can impact your credit score, but it may also have no effect at all. After you complete your credit counseling program, some creditors may choose not to do business with you, while others welcome you. The point is, with credit counseling, you at least have a chance of qualifying for credit and loans afterwards, whereas with bankruptcy, almost all lenders will spurn you as a borrower.

Where the Funding Comes From

The payments you make to your credit counseling agency are only part of what keeps their business alive. Most agencies also receive commission of sorts from major creditors. Creditors work with credit counseling companies in order to get delinquent customers to pay back at least some of their outstanding debt. When the credit counseling company succeeds at getting a customer to pay, the creditor will compensate the agency for their role in the arrangement. For even more information, check out the questions that are frequently asked and some answers to those questions.