Editorial Policy

Are credit counselors too close to card issuers?

Erica Sandberg

October 2, 2013

QDear Erica,

Is it true that the credit counseling companies you tell people to go to are in bed with the credit card companies? If that is the case, how can you in good conscience tell someone who has had bad experiences with the credit card companies to go there? — William

ADear William,

You make the relationship sound terribly sordid! It's not, though. While there is a business connection between creditor and agency, the intention is candid — as are my recommendations.

Credit counseling agencies that are associated either with the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA) are nonprofit organizations. Their main purpose is to help people get and stay out of debt. They are independently accredited, and one of the requirements is that they have to provide objective advice to the consumer, whether it is in the creditor's favor or not.Ask Erica

So back to the “being in bed with” part: What I think you're referring to is the voluntary contribution aspect of how the agencies get paid. And yes, some funds do come from the creditors. It's no secret, however.

When someone goes on a credit counseling agency's debt management plan (often shortened to its acronym, DMP), they are paying what they owe via the service. This is often in direct contrast to what they were doing before, because by the time many people reach out for help, they've stopped sending money and are even considering bankruptcy. Consequently, creditors tend to like DMPs, and appreciate the assistance, as they're getting the money owed to them. In return, some of the creditors have agreed to send the agency that set up the person's DMP a monitory contribution. Others don't. Whatever the case, agencies are required by accreditation standards to treat each creditor — whether it contributes or not — equally.

Additionally, some creditors reduce their interest rates that the cardholder is being socked with. Most of the time, debtors' interest rates are quite high because they paid late (or not at all). The AICCCA and NFCC have negotiated these rate decreases in advance, offering breaks the issuers probably wouldn't give cardholders on their own. Dropping a rate from 29 percent to 10 percent or less can make quite a difference in the amount of finance fees the debtor would normally have to pay.

It would be more accurate to consider the agency-creditor alliance as symbiotic rather than collusive. A “you help them satisfy their obligations to us; we keep you in business so you can continue your good work” kind of thing.

That said, I do not believe that such debt repayment programs are right for everybody, or that each credit counseling agency is well run. That's certainly not the case. It's also true that not all DMPs succeed.

Certainly, many people can pay their debts without assistance. If that's the case, are usually better off doing so, as participating in a DMP requires you to close all your credit cards.

So decide for yourself. If you're in over your head and want some professional advice, I do say check credit counseling out. The budget and debt counseling appointments are free, and spending an hour with a specialist couldn't hurt. In fact, it can be illuminating.

My conscience, William, is quite clear.

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