The Hard Truth About Credit Counseling

There are hundreds of businesses promoting themselves on radio, television, and the Internet as "credit counselors." Almost all of them are for-profit enterprises who are out to bleed the last few dollars out of heavily indebted consumers, in exchange for unfulfilled promises to reduce or eliminate "thousands" in credit card debt.

As a regular visitor to the message boards at MSN Money, I spend time reading and sometimes posting inside the "Ask a Credit Counselor" topic board. This particular board is hosted by the National Foundation for Credit Counseling (NFCC), a non-profit credit counseling organization. Being a staunch opponent of routine use of consumer credit, I became intrigued by the NFCC and its mission. I spent time researching the organization, how it delivered credit counseling services to consumers, who delivered those counseling services, and the financial planning philosophy behind the organization. I read materials published on its "debt advice" site. I even attempted to begin the process of becoming an NFCC certified credit counselor. What I learned from all of this concerned me. It should concern you as well.

First, I found this information on the NFCC web site about its funding:

NFCC members receive a significant part of their funding from creditors through fair share contributions. This is a voluntary contribution and no contract exists between the agencies and the creditors. These funds help members provide free and affordable services to consumers. Once a client's DMP is approved by a creditor and the client pays a creditor through one of our members, the client receives credit for the full amount of all payments. Creditors in turn pay the agencies a percentage or fair share for their assistance in helping the client to repay their debts.

What this statement simply means is that NFCC credit counseling organizations (the entities actually providing the counseling) are paid by the credit card companies. On top of that, the compensation received by NFCC credit counseling organizations is based – at least in part – on the amount of debt that is re-paid. NFCC and its credit counselors are one big collection agency for the credit card companies.

I learned several other things that really drove this point home to me:

The NFCC is aggressively biased against bankruptcy of any kind. (So am I but in some extreme cases, that is the best solution.) This, of course, must be the party line if you are dependent on the credit card industry for your very survival.

Although NFCC discourages abusive use of credit cards, the NFCC does not discourage use of consumer credit altogether. For some people (and for many of those who need counseling) that advice should be first on the list. In the many answers given by the counselors on the NFCC message board, I never saw one recommend cutting up or canceling a credit card. The credit card companies would not like this. They want to make the decisions on who keeps a credit card and who does not.

The standard NFCC solution for those who seek counseling is a "debt management plan." As best as I can determine, while these plans may include a waiver or reduction of finance charges, the NFCC debt management plans do not include a compromise of the amount owed. In general I support this but there needs to be exceptions in extreme cases.

The NFCC advice message board is primarily a marketing tool to generate revenue. At least 90% of the answers provided by NFCC counselors on the NFCC message board were limited to: "You need counseling. Make an appointment to meet with us." That was it – no substance of any kind. The rationale for that attitude is that if the NFCC gets you in counseling and on a debt management plan, it receives a piece of the action.

You can't get certified as a credit counselor unless you work for an NFCC entity. (I tried. They ignored me.) This insures that all counselors closely adhere to NFCC doctrine favoring its credit card industry patrons.

The NFCC didn't like Mr. ToughMoneyLove. After several months of study, I posted a message on the NFCC advice board that politely alerted people who had debt problems to the concerns I had about the NFCC and its motivations. My message was immediately deleted by one of the loyal credit counselors. I think I hit a nerve.

I don't think that the NFCC is an evil organization. It is clearly an improvement over the typical "debt reduction" business that heavily advertise on the airwaves. On the other hand, the NFCC is not pro-consumer and it carefully crafts its credit counseling message to support continued use of credit and credit cards. Debtors should understand this.