First of all, credit counseling companies are not regulated by the federal government. There are only 17 states that have any laws that do regulate such businesses. That pretty much means that anyone can start up a credit-counseling or debt-consolidation company. The largest credit counseling company is actually a national network of offices; member agencies typically use the trademarked name Consumer Credit Counseling Services.

Debt counselors make money by charging a small “start-up fee”, often called a “voluntary contribution”. The start-up fee varies significantly. Some companies charge around $20 while others charge much as 100 percent of your first monthly payment as a start-up fee. On top of that there is a monthly “maintenance fee”, which is around $20 on average. But, here’s where it gets a little strange:

The biggest source of income for debt counseling companies comes from credit card companies themselves. Creditors kick back a percentage of each monthly payment to the debt counselor. The creditors write this off as a debt-collection fee, assuming that they are getting more money back than if the customer went bankrupt.

The most important thing to remember when signing on with a debt counseling company is that the company is playing both sides of the fence. They are in business to make money off of both you and your creditors. And the truth is, everything they do for you, you can do yourself!

The credit counseling company wants to place you in a “Debt Management Plan” so it can earn money from creditors. Credit-counseling agencies are all registered as non-profits. Don’t be fooled, this does NOT mean that they are not profiting from your debt. They are basically paid by your creditors to be their debt collector.

On top of that and most importantly, your credit scores will suffer tremendously by using a debt counselor. The words “Managed by Credit Counseling Company” will appear under each account on your credit report that is involved in the Debt Management Plan and is just as damaging to your account as a “charge-off” is. Also, if you fail to make monthly payments as agreed, it gets even worse.

If you are in serious financial trouble, the best thing you can do is negotiate directly with your creditors. If your creditors won’t budge during negotiations, get approved for lower interest rate cards and transfer your balances.

You may also want to check out some of the financial experts programs like Dave Ramsey’s Financial Peace or Jean Chatzky’s Pay it Down: From Debt to Wealth on $10 a Day,.