Consumer Credit Counseling

American credit counseling (known in the United Kingdom as debt counseling) is a process offering education to American consumers about how to avoid incurring debts that cannot be repaid. This process is actually more debt counseling than a function of credit education.

American credit counseling agencies have established relationships with creditors to assist consumers in the United States repay debts through a debt management plan (DMP). A DMP may help the debtor repay his or her debt by consolidating payments made to creditors in return for a donation paid by the creditor. DMPs, set up by credit counselors, usually offer reduced fees and interest rates to the client. Credit counselors refer to the terms dictated by the creditors to determine payments or interest reductions offered to consumers in a debt management plan.

A common misconception among American credit counseling consumers is that credit counseling agencies work on their behalf. Most of the credit counseling agencies are nothing more than agents for the credit card banks and primarily serve their interest first. In addition, credit counseling promotional literature hype a negotiation process when if fact nothing is negotiated at all. Monthly payments, interest rates, and fees are dictated by the participating creditors and simply relayed to the consumer via credit counseling.

In the late 1980s and early 1990s, the number of American credit and debt counseling agencies increased significantly. An antitrust lawsuit was filed against the National Foundation for Credit Counseling (NFCC), arguing that the presence of creditors on the NFCC’s Board of Directors constituted monopolistic practices. As a result of this litigation, creditors agreed to fund non-NFCC member agencies as well.

These sharp increases of American credit counseling activity also created other, more serious issues in the industry. By the early 1990s, abuses by certain credit counseling organizations were so significant; it led to criticism of the entire industry.

An American credit counseling agency typically receives most of its compensation from the creditors to whom the debt payments are distributed. This funding relationship has led many to believe that American credit counseling agencies are merely a collections wing of the creditors. This fee income, known as “Fair Share,” are contributions from the creditors that originally earned the agency 15% of the amount recovered. However, in recent years, Fair Share contributions have dwindled steadily, with contributions of 4-10% being the most common.

Still the NFCC considers bankcard companies to be one of their primary "constituents," and the NFCC website promotes the fact that they collect $5 billion for creditors each year. It also promotes their efforts to steer consumers away from bankruptcy.