Warn your customers! Potential pitfalls with credit counseling firms

Both American homeownership and debt have never been greater than they are today. Although 69.2 percent of Americans own a home, consumer credit debt is in the trillions, a boon to the growing number of credit counseling companies your potential clients will use to help them out of debt so they can buy a home.

In fact, the Cambridge Consumer Credit Index, a monthly poll of American consumers that tracks attitudes towards consumer credit, reports that one of the top three reasons consumers called for credit counseling services this month is to improve their ability to "achieve future financial goals like buying a house or saving for retirement."

Many mortgage lenders and brokers who were traditionally suspicious of credit counseling organizations are beginning to welcome them because it eventually brings better business their way in the end.

But not all credit counselors are credible and some are downright criminal. The Association of Independent Consumer Credit Counseling Agencies (AICCCA), an organization that helps set national standard for quality credit counseling, provides some potential red flags consumers should avoid when deciding to work with a credit counseling firm:

• Big upfront fees. A reputable agency will never charge a large upfront fee or request a voluntary contribution such as the first month's payment of a debt management plan. Fees shouldn't exceed $75 to set up a debt management plan or $50 per month to maintain the plan. And, if the consumer can't pay the fees, the agency should still be willing to work with them.
• No accreditation. Legitimate credit counseling firms are affiliated with the AICCCA or the National Foundation for Credit Counseling. It's also wise to check the firm's standing with the Better Business Bureau or Attorney General's Office in their state.
• Delayed or missing payments. Some less-than-honest companies pocket a client's first months' payments as a fee, rather than passing the money on to creditors, thereby damaging their credit rating even further. It's important for consumers to ask how much of their monthly payment will go to creditors and when it will be sent to them.
• False promises. Some companies tell consumers they can settle their debts for little or no money, without hurting their credit rating. Legitimate credit counseling services help indebted consumers pay back what they owe - albeit at lower interest rates - but also acknowledge that their credit rating and ability to obtain new credit may be damaged.

"Full disclosure is key when searching for debt management services," advises Dave Jones, President of the AICCCA. "Legitimate credit counseling agencies have nothing to hide and are willing to answer all of a potential client's questions to their satisfaction and provide them with written disclosure of all fees and services."

About 17 states have passed credit counseling laws while others are in various legislative stages in an attempt to protect consumers from unscrupulous agencies. But your help in educating consumers on potential pitfalls with these types of services can make a difference when that consumer is back in good standing and knocking on your door.