Credit Counseling Scams

A reputable credit counseling agency can help you set up a repayment program with your creditors and teach you better money management techniques to avoid debt in the future. But some credit counseling services take advantage of people who are financially vulnerable, so proceed cautiously.

The Federal Trade Commission Act prohibits "unfair or deceptive acts or practices" of credit repair and counseling agencies. Some states also have laws that make it illegal for credit service organizations to claim to be able to improve credit ratings.

And in some states, credit counseling services must register with the state Attorney General's office and get a surety bond to do business.

Voluntary Certification and Accreditation

The National Foundation for Credit Counseling ("NFCC") is an independent not-for-profit organization that sets voluntary standards for credit counseling agencies. The NFCC Council on Accreditation ("COA") accredits over 4,000 credit counseling programs that meet NFCC standards.

In order to be accredited by the NFCC, a credit counseling agency must be recognized as non-profit by the IRS and have the proper local business licenses. To earn NFCC certification, a credit counseling program must also use adequate checks and balances to protect consumers, including:

• Auditing operating and trust accounts every year
• Offering consumer education programs
• Providing detailed reviews of consumers' income and debts, and an assessment of how each consumer got into financial trouble, with a written action plan for reducing debt
• Disbursing funds to creditors at least twice a month, or sooner in emergencies
• Giving clients a financial statement at least once every three months

The Association of Independent Consumer Credit Counseling Agencies ("AICCCA") is another national organization with similar standards.

You'll want to think twice before signing up with a credit counseling agency that doesn't belong to either of these voluntary organizations.

Warning Signs

What should tip you off that you may be dealing with a less-than-reputable program?

Watch out for illegal fees, sometimes disguised as "contributions." If the setup fees or monthly charges are very high, they can wipe out any gain you may have made against reduced finance charges, and you'd be better off negotiating directly with your creditors.

Another warning sign can be outrageous claims to instantly repair your credit rating. Credit rebuilding is a gradual process, and it's illegal to attempt to change your credit history by constructing a new, false identity.

You should also beware of advance fee loan scams, where you're asked to fork over money to get a promised loan. Under the FTC's Telemarketing Sales Rule, no one can legitimately ask you to pay until you actually receive a loan or credit. So be skeptical of any debt consolidation loan, get all the details in writing, and don't give your credit card, bank account or Social Security information over the phone or on the Internet.

Educate Yourself

The best way to protect yourself against unscrupulous credit counselors is to:

• Check out the program's reputation with your state Attorney General and local Better Business Bureau, and find out how long they've been in business
• Confirm with your creditors ahead of time that they will work with that particular company
• Understand exactly what services are offered, and whether those services address all of your debts
• Get the specifics of any monthly fees, and find out whether you'll still be obligated to pay those fees whether or not you continue to participate in the program
• Get all promises in writing
• Read your written agreement carefully

It's a good idea to report unscrupulous tactics of any credit counseling services to the consumer protection division of your state Attorney General. You can also file a complaint by calling the Federal Trade Commission Consumer Response Center toll-free at 1-877-FTC-HELP (382-4357)or filling out the Federal Trade Commission Consumer Complaint Form online.

Once you've signed on with a credit counseling agency, it's important to check regularly with your creditors to make sure your payments are reaching them.

And taking advantage of the educational programs offered by credit counseling agencies can keep you from backsliding once you've begun working your way out of debt.

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