Increasing numbers of consumers who find themselves overwhelmed with credit card or other debt are turning to a variety of services that provide credit- and debt-related services:
- Credit counseling, when done well, provides consumers with comprehensive education regarding money management skills based on individual needs. Generally, nonprofit credit counselors are best, but the Federal Trade Commission warns that even nonprofit credit counselors can charge hidden fees or urge their clients to make “voluntary” contributions that increase debt.
- Debt management ostensibly helps consumers manage high debt levels. Debt management companies counsel consumers about how to manage or consolidate their debt into one monthly payment and arrange for more affordable payment plans with credit card companies and other creditors.
- Debt settlement, debt termination, and debt elimination purportedly help consumers settle debts for less than the full amount of the outstanding debt. But they also expose people to risk because they often require consumers to stop paying their debts, which often results in penalty interest rates and fees.
- Credit repair may falsely represent that a consumer’s credit score can be repaired or improved by removing negative reports from a credit score.
- Other businesses—such as subprime creditors and mortgage rescue scammers—market high-cost credit to consumers with unaffordable debt and low credit scores.
Federal law prohibits unfair, deceptive, or abusive trade practices, charging advance fees, and failing to make required disclosures. Several states have enacted legislation to regulate fees, prohibit advance or disproportionate fees, establish licensing and bonding requirements, require specific disclosures, and require that products be suitable for a client’s personal situation. Nevertheless, federal and state regulation has thus far generally been inadequate to curb abusive practices.
The Bankruptcy Abuse Prevention and Consumer Protection Act, enacted in 2005, requires consumers seeking bankruptcy to get credit counseling from a government-approved organization within six months of filing. The National Foundation for Credit Counseling has found that only 10 percent of these counseling sessions were conducted in person. The rest were conducted over the telephone or Internet.
Credit- and Debt-Related Services: Policy
Licensing of providers of credit- and debt -related services
Providers of credit- and debt-related services should be required to register with, or obtain a license to conduct business in, each state in which they operate.
- prohibit unfair, deceptive, or abusive acts and practices, including those that fail to provide the relief offered or create unaffordable payments; and
- require companies providing credit- and debt-related services to evaluate and ensure that their services are in the best interest of the consumer.
Written contracts and disclosures
Policymakers should require providers of credit- and debt-related services to provide written contracts to consumers that include:
- an individual financial analysis,
- disclosure of the risks of the products or services being offered, including the possible impact on debt loads and credit scores and reports, as well as any conflicts of interest;
- disclosure of the total cost of the services and payment schedule;
- information on other options to deal with debt; and
- the ability to cancel the service without being charged a penalty.