Credit Counseling Confusion

The news from the credit card debt corner is grim. The average household with credit card debt owes more than $8,000 on its cards. That's average, meaning that many owe much more. Worse, Americans with lower-than-average incomes tend to be the ones who end up paying the most for the credit they use, and they also tend to be less informed about credit counseling agencies.

That's a big problem, since many credit counseling agencies are not what they appear to be -- quick and welcome solutions to life force-draining financial woes. The Consumer Federation of America (CFA) and the credit counseling firm InCharge Institute of America recently released a report (.pdf file), noting that, "The potential vulnerability of these uninformed consumers to fraud and abuse is a serious concern because credit counseling is the major institutional alternative to bankruptcy.. It is also a concern because pending legislation in Congress would mandate that consumers receive a credit counseling consultation before they are allowed to file for bankruptcy."

The CFA and InCharge issued some recommendations, such as:

  • Require credit counseling agencies to better inform consumers about fees, the sources of agency funding, the unsuitability of debt management plans for many consumers, and other options that consumers should consider, such as bankruptcy.
  • Give consumers three days to cancel an initial agreement with an agency without obligation. Allow mutual cancellation rights to either party thereafter, if notice is given.
  • Cap set-up fees charged by agencies to enroll consumers in debt management plans to prevent consumers from being charged a full month's consolidated payment for this purpose. Consumer groups have proposed a cap of $50.
  • Most creditors should significantly cut the interest rates they charge to consumers in credit counseling.

Credit counseling is a tricky business -- there are indeed legitimate and worthy enterprises engaging in it. But there are also a lot of operations using deceptive practices and taking advantage of people in precarious situations. Do some due diligence before signing up with anyone.

And if you or someone you care about is mired in credit card debt, don't give up hope -- learn much more in Dayana Yochim's article on the Credit Counseling Crisis and in our Credit Center. Oh, and your friends at the Federal Trade Commission have some good info on a lot of credit topics, too.

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