Consumer credit counseling is typically a paid service for consumers that helps them set up a budget and repayment plan with creditors. The counselor also usually tries to work with creditors to lower interest rates and fees. Normally, the credit counseling company will require the consumer to make a monthly payment to them. The credit counseling company will then disburse the funds to the creditors which are part of the credit counseling program. For this, the credit counseling company will take a fee out of the monthly payment. Consumer credit counseling companies are both for profit, and non-profit companies. Many states, including the State of Ohio, have strict laws regulating consumer credit counseling companies. A company will take a fee whether it is for profit or on-profit, and many non-profit companies in this industry continue to violate various states’ laws.
For example, in Ohio the law regulating these types of companies as well as debt settlement companies is called the Debt Pooling Companies and can be found at Ohio Revised Code 4710. Among other things, this law regulates the amount a consumer credit counseling company is permitted to charge. Section B of 4710.02 states as follows:
(B) If fees or contributions for providing debt adjusting services are charged or accepted, directly or indirectly, no person providing or engaged in debt adjusting shall do any of the following:
Charge or accept a fee or contribution exceeding seventy-five dollars from a debtor residing in this state for an initial consultation or initial set up of a debt management plan or similar plan;
Charge or accept consultation fees or contributions exceeding one hundred dollars per calendar year from a debtor residing in this state;
Charge or accept a periodic fee or contribution from a debtor residing in this state for administering a debt management plan or similar plan, which fee or contribution exceeds eight and one-half per cent of the amount paid by the debtor each month for distribution to the debtor’s creditors or thirty dollars, whichever is greater.
In summary, credit counseling companies are permitted to charge a one time set-up fee of $75.00, an annual $100.00 consultation fee, and most importantly, a fee not to exceed 8 1/2% of the monthly payment or $30.00 whichever is greater. This means if you are making a payment of $500 to the credit counseling company, your monthly fee should be no greater than $42.50. Many, many companies charge more than this amount, and as such, are violating the law in the State of Ohio.
In deciding whether to engage a credit counseling company, you must determine if they are complying with your state’s laws regulating such companies, if the company is reputable, and most importantly, if such a program is right for you. Among the main debt management options, you will likely pay more in the long run using a credit counseling agency. Also, you must at least be knowledgeable as to the impact such a program will have on your credit score. Using a credit counseling service will likely not affect your FICO score. However, the actions you take based on recommendations of a credit counselor may, and usually do, impact your credit score negatively. Credit counseling is sometimes the correct choice for individuals overwhelmed with debt, but oftentimes it is not. A consumer should think about the concerns addressed above, research the company they are considering and make an informed decision prior to rushing to contract with a credit counseling company.