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Credit Counseling Services

Many consumers who are in a debt crisis seek help from credit counseling services as an alternative to bankruptcy. While there are many reputable agencies helping consumers get out and stay out of debt, there are also an increasing number of companies that are out to victimize the debt-ridden consumer.

Promises of quick debt reduction or debt settlement plans with high up front fees (in the hundreds or thousands of dollars) should be a red flag to consumers. Selecting the wrong credit counseling service can cause you considerable financial harm.

The Minnesota Department of Commerce oversees two types of consumer credit businesses:

Credit Service Organizations

These businesses, for a fee, offer education and personalized advice to consumers. They can improve your credit rating or history, help you obtain credit, and offer credit advice or assistance. These organizations must offer you a contract describing their fees and services and they must register with the Department of Commerce. Legitimate organizations will have properly trained credit counselors, not just telemarketers. These for-profit businesses must provide you with services before they charge you. You should not be paying up-front for this type of service. Consumers who may not need individual treatment can find good information on budgeting and improving your credit in public libraries or from many community service offices.

Debt Management Companies

These businesses also charge a fee for helping over-extended consumers by developing a budget and by receiving money from the consumer to re-pay creditors under a specific debt reduction plan. Companies located in Minnesota providing debt prorating services must be licensed by the Department of Commerce. Firms located outside of the state offering similar services by Internet or mail are not required to be licensed. If you choose to use a firm in another state, you should contact that state's regulatory agency to confirm the firm's license status.

Before you sign up for any debt reduction plan, make sure to read the contract and understand how the program works. You will still pay your debts, just at a reduced rate to a debt management company, which will negotiate with your creditors and make your payments for you. It is best to deal with a Minnesota licensee that has a local office with staff available to answer your questions.

In some cases, consumer credit counseling service organizations provide the services of a debt management company as well as the educational and advisory services of a credit service organization.

The trouble with "non-profit" pretenders

Many legitimate credit service organizations (using a wide variety of names) enjoy a non-profit status, meaning they may charge for services up-front, before providing the service. Consequently, many of the fraudulent agencies that are just out to collect your money pretend to be non-profits. In order to legally qualify as a non-profit credit counseling service, the agency must provide you with financial education. The scam artists are likely to send you a financial planning brochure and call that "education." Legitimate agencies should be willing to sit down with you and discuss your spending habits and help you formulate a new budget plan.

How to find a reputable credit counseling service

  1. Check with the Minnesota Department of Commerce to see if a credit service organization is registered or if a debt management company is licensed.
  2. Find out if the counseling agency is a member of a major association, such as the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Affiliation with these organizations ensure that the member agencies meet certain quality and ethical standards and that the credit counselors receive proper training.
  3. Choose an agency that offers free face-to-face counseling sessions to discuss your spending habits, arrange a budget and help you handle your personal finances. Signing up for consumer credit services or a debt reduction plan over the phone or the Internet puts you at risk for losing money to a fraudulent enterprise.

Get an agreement in writing, and read it before you sign it

  • Avoid companies that require high up-front fees (which could be in the hundreds of dollars), "voluntary contributions" or high monthly service fees that only add to your debt. Most legitimate agencies charge about $10 to $20 to start up a debt repayment plan and less than $20 per month in service fees.
  • If you are dealing with a debt management company, make sure you are kept informed about when and how much of your monthly payment is going to your creditors. Beware of credit service companies that keep your first month's payment for themselves.
  • Beware of unrealistic promises, such as erasing your debt for pennies on the dollar in a short time span (most legitimate debt reduction plans take two to four years to repay) or promises to reverse a bad credit score. 
    As always, remember the rule: If it sounds too good to be true, it probably is.
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