Criticism And Complaints against the Credit Counseling Industry

In the 1980s and the 1990s the number of credit counseling agencies increased by a significant number.  The first allegation that was made against the National Federation of credit counseling was the presence of creditors on its board of members.  They were accused of harboring and practicing monopolistic practices.  Owing to this lawsuit the creditors agreed to fund credit counseling agencies that were not members of the National Federation of credit counseling as well.  Over time the issues with credit counseling activities became more serious so much so that the entire industry began take some flak.

The common reasons for criticism of credit counseling agencies are non-ethical practices, charging and realistic and hidden fees, providing false information and misrepresentation to the consumer and being the collection wing for the creditors.

One of the primary concerns and criticism that has been raised against credit counseling agencies is that a credit counseling agency typically receives most of its compensation from the creditors as something that is called the fair share.  Whenever a credit counseling agency enters the consumer into a debt management plan and makes the payment to the creditors it receives a commission on that remark which originally used to be 15%.  These were known as fair share contributions.  However, in the recent times these contributions have dwindled to four to 10 per cent in most of the cases.

The credit counseling trade organizations promote the fact that they recover billions of dollars to creditors each year along with promoting their efforts to steer consumers away from bankruptcy.  Several organizations have voiced concern over the fair share of funding model as evidence that many credit councilors serve the interest of the creditors over the interest of the consumer.  They allege that the credit counseling services hide this fact from the consumer and often try to lure him into being a part of the debt management plan when he does not need it.  The credit counseling services responded by saying that their job is not take sides put to negotiate with all parties equally to help successfully resolved that is.

Another common criticism of credit counseling is the assertion that participating in the debt management plan will ruin the consumers credit rating.  However this may or may not be a very valid point as certain credit scoring models such as Fair Isaac Corporation credit score does not consider participation in a debt management plan in their calculations for the FICO credit score.  The this is not to say that the participation in a debt management plan will not hurt the consumers ability to get further credit.  Most of the lenders view multiple risk factors to determine the consumer’s creditworthiness.  A lender who is considering an application for a loan like a mortgage or automobile will typically scrutinized the entire credit report extensively and verify employment and income information as well.  Some lenders may view the participation in a debt management plan as indicating off their non-ability to manage their finances and handle further debt.  There are however certain lenders and banks that consider being in a debt management plan as a positive sign as to the customers willingness an effort to pay off his debts.

Credit counseling agencies have also been criticized for not making the client understand his future responsibility towards debt repayment.  Credit counseling agencies have been accused of asking the consumers to practice non-ethical practices like to stop paying the creditors in order to be in a more multiplicative position to negotiate lower interest rates.  Credit counseling agencies have also been accused of having hidden fees or for pocketing the first payment made by the client in a debt management program.  Consumers who have been seeking a debt management plan for the sole purpose of lowering their interest rates without having any accounts that have been due in the past have discovered that their accounts are deliberately made late in order to lower the interest rates.  Intentionally causing a consumer’s account to be past due damages the client’s credit history which may affect his chances to get credit in the future.

Given the criticism that the credit counseling agency is receiving it has come into close scrutiny bought by the consumer and government regulators.  The Federal Trade Commission has filed lawsuits against several credit counseling agencies and urges caution to the consumer when deciding upon a credit counseling agency.  The Federal Trade Commission has received almost 10,000 complaints from consumers about credit councilors many concerning high or hidden fees and the ability to opt out of so-called voluntary donations.  The better business bureau also reports high complaint levels about credit counseling.  The Internal Revenue Service has denied non-profit 501 (c) (three) tax exempt status to around 30 of the nation’s credit counseling agencies.  Although these 30 credit counseling agencies are among the few of the 1000 credit counseling agencies in America they account for more than half of the industry’s revenue.  Further audits of non-profit credit counseling agencies but the Internal Revenue Service is our ongoing.  This will further effect the future of Cadet counseling services as in several states a credit counseling agency is required to be a non-profit organization in order to function.  The main contention behind relocating the tax exempt status is whether a tax exempt credit councilor actually performed the mandated mission by assisting the community at large or served their own bottom line by including consumers in debt management programs in order to and through the fair share practice.  Everyone by and large he is unsure about this. Congress has also investigated the credit counseling industry and has issued a report stating that while some agencies function on an ethical ground other charged excessive peace and provide poor service to the consumers.  The report also stated that NFCC member guidelines if applied to the entire credit counseling industry would go a long way towards eliminating the abuses they uncovered in some part of industry.

Moving outside the United States of America, the financial consumer agency Canada advises all Canadians to research and do their homework on various credit counseling services before entry into formal contract. According to the financial consumer agency of Canada the consumer should take care to compare the services of a different fee structures of for-profit and not-for-profit credit counseling services.  They should make a careful note of the services being offered by both of them.  Consumers considering a debt management plan should be made aware that an art seven credit rating will be entered in the credit report that will show future lenders prospective employers and landlords that they used credit counseling.  This notation may stay on the credit report for at least two to three years.  Prospect of lenders, employers and landlords may view information in an individual’s credit report if the application forms consumer signed grants them permission to do so.