One Step Forward or Two Steps Back

If you've reached a point when your credit load has become too much to bear, you're probably finding yourself drawn to credit repair claims. From TV infomercials to online pop-up advertisements, it seems like everywhere you turn there are legions of credit repair gurus ready to slash your debt and boost your credit score.

As you might expect, not all of these companies are the heroes they claim to be. In fact, many credit counseling companies can leave you in an even more precarious situation - after they've collected their fees, of course.

To separate the good guys from the bad, let's start out by defining the reputable credit counseling organizations. Ravi Shahani, a credit counselor with Consumer Credit Counseling, offers up the following description of a reputable consumer credit counseling company: "A non-profit organization that wants to financially empower its clients and help them gain control of their life through education and financial management."

Such companies will advise you on managing your money and your debts, help you develop a budget, and generally provide you with free educational materials and workshops. They have counselors trained in the field of consumer credit, money and debt management, and budgeting. If they're on the up and up, these organizations will be happy to send you free information about themselves and provide any information you might need.

Shahani describes how a typical case would work. "A person calls in and tells us they have too much debt," he says. "We then analyze their situation and provide free budget counseling. If they are in bad shape with creditors, we may offer debt management." Shahani notes that if a client chooses debt management, they will be charged both an application and monthly service fee. If you're talking to a credit counselor, steer clear of the ones who want to charge you for analysis, or more importantly, push a Debt Management Plan.

If your financial woes have become unmanageable, a credit counselor may suggest a Debt Management Plan (DMP). The plan is an arrangement between you, your creditors and the credit counselors. Through the DMP, you deposit money each month with the credit counselors. They then use that money to pay your debts based on a schedule they have negotiated with the creditors, who may have agreed to lower your interest rates or waive certain fees in the hopes of recouping some of their money.

DMPs are effective, but generally are stretched out over a long period of time. By adhering to the payment schedule, you could find yourself debt-free by the end of the repayment period. However, you may find that part of the deal is that you cannot acquire new credit while you're cleaning up your record. A DMP is generally the last resort for a credit counselor, and if they are truly reputable, it will come with a budget and advice on sound money management skills.

If you pursue a DMP, make sure you know which of your creditors are participating. You'll still have to pay anyone not participating. And beware the credit counselor who wants money upfront or promises to remove negative information from your report. The good companies understand they'll be paid over time, and that only by making regular payments will your credit score begin to reverse itself.

Everyone knows that in life nothing comes for free. Keep that in mind as you begin to investigate Debt Negotiation or Debt Settlement Programs. Firms that claim that they can arrange to significantly reduce the balance of your debt, as well as wipe all the blights from your credit report, relentlessly push these programs. These guys deserve a red flag the size of Kansas.

How do they work? First, they tell you to stop making payments to your creditors. (Of course, they won't be shy about charging you a bunch of upfront fees, monthly fees, etc.) After you've gone late on numerous payments, they will then contact your creditors and attempt to have your debt defined as uncollectible. Once they've slapped that term on your balance, your creditor may be willing to accept less than the amount you originally owed, hoping to collect something. That's how you wind up getting your balance reduced. Unfortunately, your credit score will be shot and the IRS will consider the principal that supposedly got wiped off the books to be income. In other words, you'll have yourself a new tax obligation.

But do these people clean up your score? Temporarily at best. They tend to use a shotgun approach, disputing everything in your report. In response to the dispute, the credit reporting agencies will remove all disputed items temporarily while they investigate. At that point, these scam operators will send you "clean credit reports."

Unfortunately, once the credit bureaus do complete their investigations and verify that the negative information is valid, they promptly replace the negative information. The net effect is you are left with the same bad credit you started with. By then, your credit-counseling friends will have pocketed your fees and will become busy not returning your calls.

A credit counselor can be an enormous help, you just need to be realistic about what they can accomplish. Expect them to guide you toward a lengthy, disciplined process for getting your finances in order. You should only deal with the ones who check out with the Better Business Bureau and offer you plenty of company information. If you're being pushed into a DMP or Debt Negotiation, simply move on to the next credit counselor - there are plenty out there willing to help you.

Avoiding Shady Operators

Here is a list of things to be aware of when selecting a credit counselor: • Steer clear of organizations that charge for information • If an organization won't help you because you can't afford to pay their fees, look elsewhere • Don't count on verbal promises - get it in writing • Don't use the company unless they are licensed in your state • Don't go with a company who compensates employees based on the amount of people they get to sign up for a program • Don't go with a company unless they offer a wide range of services, including budget counseling, as well as savings and debt management classes

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