Financial Literacy: Things to know when using credit repair and debt counseling organizations

With the holidays over, many people face the prospect of paying a mountain of bills. Some of these are a direct result of the holidays, but that debt likely represents the steady accumulation of debt in the past year or more. Many people will be tempted to turn to professional services to assist them in gaining some control over their debt.

This year, National Consumer Protection Week, February 1 - 7, 2004, highlights the issue of financial literacy. Eliminating debt and restoring one’s credit are worthwhile goals and are keystones of financial literacy and stability for consumers. There are numerous credit repair, credit counseling, and credit management or service companies that charge fees for providing services that may, or may not, achieve the goals of the consumer. As with the purchase of any good or service, the buyer must beware.

In the past year, my Consumer Protection office and the Better Business Bureaus serving Colorado received more than one hundred complaints and queries about credit repair, counseling, management, and/or service companies. According to The Washington Post, over 9 million Americans contact credit counseling or repair services every year. Deceptive practices among companies offering such services are a growing consumer problem.

Patterns of potentially unlawful conduct have been the topic of recent discussion at the national level. In October 2003, the Internal Revenue Service, the Federal Trade Commission, and the National Association of State Charity Officials issued a consumer alert advising individuals to fully research any such company they might consider using.

According to these consumer agencies, many credit counseling, repair, or management businesses do charge fees, sometimes high fees, for their services. They often fail to properly disclose the amount of the fees they charge. These fees can range from a few hundred dollars to over $2,000. And, some of these companies are organized as not-for-profit businesses but engage in for-profit activities. In a recent Colorado news story, a consumer described how she contracted with a credit management firm to help her reduce her debt. After eight months, her debt had “ballooned” and her credit rating had dropped. She did not get the services she believed she had purchased and she got further into debt as a result. Her experience has become all too common.

While law enforcement efforts focus on investigating potentially illegal activity and stopping offenders, consumers can protect themselves from harm by doing their homework before they pay credit counseling, repair, or management businesses – whether or not they are promoted as non-profit entities. It can be difficult to distinguish a legitimate company from one that is not. Therefore, consumers should research these companies. Consumers can start by contacting the local Better Business Bureau to check the company’s reliability report with the BBB.

In addition, consumers may want to engage in some self-help prior to engaging a company advertising credit repair, counseling, or management services. These services traditionally provide education about how to manage credit and how to deal with debt. There are many books and guides available now to assist the consumer in learning those techniques. A consumer may also determine that he will be better served using funds to pay his creditors directly rather than paying that money to a credit repair, counseling, or management organization.

Finally, as with any contract: Read the paperwork before you sign. Any contract from a non-profit organization that requires a “donation” in return for services should raise a red flag. All fees should be clearly disclosed in the contract. If something is unclear, request an explanation. Know what you are buying before you sign the contract. Do not allow your goals of becoming debt-free and credit savvy to be sabotaged.

Attorney General Salazar advises consumers with credit problems to avoid companies claiming they can “repair” or “erase” bad credit.

The following is information regarding credit repair:

• Credit repair businesses are prohibited from collecting fees in advance of completing services (unless they are a duly registered not-for-profit company).
• Consumers must be provided a 5-day right to cancel the contract. Consumers must be provided with additional notices and disclosures of their consumer rights.
• Credit repair companies cannot legally provide a permanent fix to remove accurate credit information from a credit report.

The following is information regarding consumer debt in general:

• Negative credit information, if accurate, may remain on a credit report for seven years and then is automatically removed.
• Bankruptcy information remains on a credit report for ten years.
• Some companies advise consumers to use new social security numbers or employer identification numbers but doing so is a federal crime.
• If erroneous information is listed on a credit report, consumers can correct the problem themselves at no charge by sending a written explanation to the consumer reporting agency and including copies of paid bills and identification information. Consumer reporting agencies then have thirty days to reinvestigate the consumer’s claim and correct their records.
• Colorado consumers have a right to order one free copy of their credit report each year. Consumers can use this opportunity to check their credit reports for errors.
• Consumers experiencing financial difficulties may want to alert creditors and attempt to negotiate a new repayment plan, request a deferral or reduction of payments, or otherwise work out arrangements before contacting a credit repair, counseling, or management organization.