The Real Story on Credit Counseling
Credit counseling advertisements are everywhere – on the television, the radio and the Internet promising to “lower your interest ratesâ€, “reduce your monthly paymentsâ€, “end collection calls†and “get you on the road to financial freedom.â€
Sometime credit counseling agencies deliver on their promises. Most of them are a bit of a racket.
One of the most famous examples of a Credit Counseling racket was Ameridebt who promised clients they could lower interest rates on credit cards. After being advised to call a 1-800 number clients apply to have the interest rates lower and then within half an hour would receive a call back from a representative from Ameridebt stating that the mission was accomplished. Then the client would be asked to pay amount, usually around $500 a month to disburse funds to their creditors. At least that’s how Ameridebt should have worked if it was ethical…
Many people found out the hard way that Ameridebt never paid the lenders. This sent many people’s credit into a tailspin. The credit card companies had received no payments from Ameridebt. This ruined many people’s credit scores within weeks.
The Federal Trade Commission sued the company in 2003, saying that it lied to customers about the fees it charged and services it offered leaving many of its customers worse off. It also posed as a non-profit company when it was a for profit company. Still AmeriDebt insisted to the very end that it helped hundreds of thousand of people pay their bills and avoid bankruptcy.
The point is that even though Ameridebt got caught there are many unethical companies operating in a similar manner to Ameridebt that have not been regulated, stopped or caught.
Most credit counseling companies find it easy to pose as a non-profit organization as the entire industry was once non-profit and ruled by an organization called the National Foundation for Credit Counseling. This organization was largely supported by contributions from banks and credit card companies.
The mandate of the National Foundation for Credit Counseling was to help borrowers negotiate lower interest rates and payment so they could avoid bankruptcy. The lender benefited from payments made by debters orchestrated by from the National Foundation for Credit Counseling. In return the lender would return a portion of each check, an amount known as a “fair share†to the credit-counseling agency to fund its operations.
However has consumer debt skyrocketed in the 1990s a new type of credit counselor evolved – one that would charge handsomely for helping customers who were able to make payments lower their interest rates. This new development caused the major creditors to start dropping their fair share contributions, which in turn made it impossible for the truly non-profit National Foundation for Credit Counseling.
These new style credit counselors often kept the first month’s contributions or charged juicy big hidden fees. Some failed to pass along consumer contribution at all, which resulted in multiple late payments and totally destroyed credit scores. Many of them were also boiler room operations that concentrated on collecting the fee for the service, without any follow up performance. This is why you should be extremely wary before using a credit counseling service of any kind. The boiler operation and fraudulent unethical credit counseling service is alive and well in North America.