Portfolio at NYU

Posted 06.17.04
Perils of Credit Counseling
The Wall Street Journal Sunday [May 16, 2004]

By Aleksandra Todorova

For people overwhelmed with debt, it sounds tempting: Just pay a small monthly fee to a credit counselor who will haggle with lenders, whack interest rates and trim a big pile of bills down to a single low monthly payment. The credit-counseling industry has helped millions of people pay off their debts since the 1950s.

But lately complaints about abusive practices have cropped up around the country. A recent congressional hearing spotlighted credit-counseling abuses, such as steep and undisclosed fees, one-size-fits-all "solutions" and profit-hungry affiliates of not-for-profit counseling firms.

Of course, many credit counselors still do provide valuable services for reasonable fees. To avoid problems, look for these warning signs:

Fee overload. Some companies charge monthly fees that can run as high as 10% of customer payments. For people with heavy debts, that could mean shelling out hundreds of dollars a month just on fees. Some fail to disclose that the whole first monthly payment will be kept as an enrollment charge. In response, certain states have started to impose caps on the fees that agencies can charge -- say, up to $5 or $7 per account, but no more than $50 or so a month.

Prior complaints. Travis Plunkett, legislative director at the Consumer Federation of America, advises consumers to check with the Better Business Bureau and the state attorney general's office for complaints or ongoing investigations of the company in question.

Big hurry. Never sign a contract before you get a detailed proposal from the agency with a clear fee structure and repayment terms.

Cookie-cutter plans. Don't go with an agency that pressures you into a debt-management plan right away. Traditional credit-counseling agencies spend an hour or more with a client before they advise such a plan. And don't give out bank-account information before you've signed a contract.

Few choices. Some agencies enroll people in debt-management plans without discussing other options (such as reverse mortgages) that may be better choices. Debt-management plans are money makers for credit counselors, so there's an incentive to sign people up.

High-pressure pitches. In testimony before Congress, a former employee of one agency described its office as a "boiler room" with an electronic board displaying names of counselors with top sales, while a sign in the lunchroom said: "The two lowest producing counselors will be cleaning the refrigerator on Saturdays." A spokesman for the company involved said this ex-employee worked only six days and the assertions were "factually not correct."

Many credit-card companies have curbed their support for the credit-counseling industry, says Jack Marcus, president of A Better Way Credit Counseling in Boynton Beach, Fla., and a leading lobbyist for imposing stricter regulations on the industry. "They used to give us 15%" of payments made through debt-management plans "at one time, [but] they're now doing an average of about 6%, and a lot of times they don't give us anything," he says. In this situation, counseling companies may feel forced to go for high volume.

It's no panacea, but experts say it's a plus if the agency's a member of the National Foundation for Credit Counseling or the Association of Independent Credit Counseling Agencies. The NFCC says its members these days are getting more of their income through government grants and donations from charitable organizations.

Unbelievably good offers. Even though agencies often promise to negotiate, each creditor has preset guidelines for debt-management programs. A lender might want, say, a minimum of 2% of the balance a month and be willing to lower the interest rate to 7%; there's really no room for negotiation based on your situation.

So if the payment proposed by one company is much lower than another's -- and the reason isn't the fees -- that could be a red flag.