Credit Advice You Can Trust

When you're looking for a firm to help you get out of debt, don't rely on an Internet search.

When Lanette Bridges set out to tackle her massive pile of debt -- $30,000 in credit-card bills and bank loans -- a couple of years ago, she turned to the Internet first. Bridges typed "credit-counseling services" into an online search engine to find an agency that would help her pay it off. Bridges, an assistant teacher at a child-care center in Imperial, Mo., found an agency that promised to withdraw money every month from her bank account to repay her creditors. She signed up.

Several months later, Bridges was still getting calls from her creditors. When she contacted the agency, she was told not to worry. But she checked her balances with her creditors anyway -- and saw that her debt hadn't decreased.

At that point, a friend recommended she call ClearPoint Financial Solutions, another agency. This time, she checked with the Better Business Bureau to make sure ClearPoint was legit. It was. A ClearPoint counselor was able to talk to her creditors, explain what happened and work out a payment plan. But Bridges still lost the more than $2,000 the bogus firm withdrew from her checking account.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

With consumer debt at sky-high levels, such stories are becoming all too common. Two prevalent schemes involve companies that claim to be credit-counseling agencies and firms that say they are "debt settlement" organizations. A legitimate credit-counseling agency will educate you about budgeting and how to use credit, as well as help you set up a debt-management plan if you need one. A debt-settlement firm merely offers to negotiate with your creditors. But bogus companies take your money and run.

Since 2001, the Federal Trade Commission has sued 14 firms that claimed to be credit-counseling agencies or debt-settlement firms but allegedly were neither. Last fall, as a result of one of the suits, a record $12.7 million was returned to 287,000 victims.

In a related scam, often hawked in radio ads, firms claim to be able to "repair" your credit record or make your credit score go up virtually overnight. "Steer clear of a credit-repair firm that claims it can take accurate, negative information off your credit report," says Lynne Strang, vice-president of the American Financial Services Association, the trade association for the consumer credit industry. "They can't." If your credit score has been hurt by inaccurate information, you can alert the credit-reporting agency on your own.

Is it legit? Once you get in the door, ask about fees. If the credit counselor won't talk about what the agency charges, walk away. According to the National Foundation for Credit Counseling, the initial counseling session should be free or cost very little -- $15 or so. If, after a 60- to 90-minute initial consultation, you sign up for a one-time debt-management plan, the average fee is $28. If you enter an extended debt-management program, you may end up paying about $23 a month.

If the agency tells you to stop paying your creditors, that's a bad sign -- if you stop paying your bills, that puts your credit rating at risk.

Also beware of agencies that pressure you to sign up for a debt-management program. Some agencies focus on such programs because they're paid by the creditors to sign up clients.


Three Easy Steps to Find a Good Credit Counselor

1. Get in touch with one of the organizations that help vet credit-counseling firms: the National Foundation for Credit Counseling and the Association of Independent Consumer Credit Counseling Agencies. Only legitimate credit-counseling firms can join either organization.

2. Run the agency's name by your local Better Business Bureau to see whether it's accredited before you hand over any money or financial information to a credit-counseling service.

3. Then check for complaints against the organization and whether they were resolved.

Associate Editor, Kiplinger's Personal Finance