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How to Avoid a Consumer Credit Counseling Scam

How to Avoid a Consumer Credit Counseling Scam

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Daniel Cohen
UpdatedJun 11, 2024
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    2 min read
Key Takeaways:
  • When it comes to credit counseling, there are good firms and bad ones.
  • Top 10 questions to ask when shopping for the best credit counseling provider.

10 Tips to Protect You From Credit Counseling Scams

No one wants to get scammed. But scammers take advantage of people every day. Scammers are called con men, not because they are convicts, but because they earn your confidence, before scamming you.

Whenever you are looking for assistance in solving a problem, certain predators know that it will be easier to take advantage of you. You are more vulnerable when seeking help, especially for a problem as stressful and potentially embarrassing to speak about as a serious debt problem. For this reason, you should do your homework before you speak with any firm that offers financial assistance, so you can protect yourself from scammers.

When it comes to credit counseling, there are good credit counseling firms and bad ones, just as there are good players and bad players in every industry. To avoid falling for a credit counseling scam, here are 10 tips and questions to ask before signing-up with a credit counselor.

  1. Does the company receive compensation from the creditors? Many credit counseling firms receive funding in the form of what are called "fair share" payments from creditors. The payments are incentives to get consumers into Debt Management Plans (DMPs), paying back as much of their debt, plus interest, as possible.
  2. How is the company rated online? Check the rating at the Better Business Bureau. Compare the rating to other firms in the same industry.
  3. Does the company provide real consultations? Does it provide advice/education to consumers free of charge? Or is the company simply directing every consumer into a DMP? If you are being rushed into a Debt Management Plan, that is a red flag.
  4. Does the company provide educational material free of charge? These include household budgeting and financial advice. Many firms consider educational material as an additional-fee source, not as a benefit to their clients.
  5. What is the background of the company's management team? Look for good, relevant education and experience — not a team that jumps from opportunity to opportunity to make its fortunes.
  6. How long has the company been in business? Be wary of businesses with a short track-record.
  7. Is the credit counseling firm licensed and bonded? Because credit-counseling firms actually handle clients' money, bond or surety coverage provides recourse if a client's funds are mishandled.
  8. What are the company's drop-out and success rates? Request these statistics. Leading credit card companies report that many credit-counseling firms have drop-out rates as high as 90%.
  9. Does the company ask for a "voluntary contribution"? This kind of payment is not required. Don't let anyone pressure you into paying it.
  10. How patient are customer service representatives in responding to questions? Do not be shy about asking questions. If you don't understand something, ask as many times as you need until you understand. A credit counselor that is not patient with you is not looking out for your best interests.

VIDEO: Credit Counseling - What is Credit Counseling?

Dealing with debt

Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q1 2024 was $17.69 trillion. Auto loan debt was $1.62 trillion and credit card was $1.12 trillion.

A significant percentage of people in the US are struggling with monthly payments and about 26% of households in the United States have debt in collections. According to data gathered by from a sample of credit reports, the median debt in collections is $1,739. Credit card debt is prevalent and 3% have delinquent or derogatory card debt. The median debt in collections is $422.

The amount of debt and debt in collections vary by state. For example, in Texas, 37% have any kind of debt in collections and the median debt in collections is $1997. Medical debt is common and 19% have that in collections. The median medical debt in collections is $835.

While many households can comfortably pay off their debt, it is clear that many people are struggling with debt. Make sure that you analyze your situation and find the best debt payoff solutions to match your situation.