Credit Consolidation Services

Debt Consolidation Organization

Credit score counselors are falling all over themselves to help you out of debt, but some do more harm than good. Here's what you require to know, including whether you require it and also the red flags for rip-offs.

Jim is deeply in debt and desperate. He's seen all the television ads from credit counseling services that promise to help him, and a company that assures him it can painlessly make his debts go away has also approached him. Is this, he asked me in an e-mail, as well good to be accurate? Frequently, the answer is yes.

Jim's thinking of entering a world that's fraught with fraud, misrepresentation and controversy. Credit Consolidation Services, also known as debt counseling, has become a $7 billion business, but not all of the players are legitimate.

The best credit counseling can assist individuals who are behind on their debts get back on their feet. Fly-by-night outfits can disappear with your money, and what remains of your credit rating. In between the two are whole fleets of operators who may or might not leave you better off than you are now.

Credit Consolidation Services

The morphing scene of credit consolidation services counseling

A decade ago the credit consolidation services industry was dominated by the National Foundation for Credit Counseling, whose nonprofit affiliates -- usually known as Customer Credit Counseling Services -- negotiated reduced interest rates and payment programs for individuals who had fallen behind. These days you can discover the Customer Credit Counseling Support in just about any city.

But the credit consolidation services now have plenty of competition. A rise in customer debt in the 1990s helped spawn hundreds of rivals, many with million-dollar advertising budgets, slick Internet come-ons and sound-alike names.

Some do a great job of negotiating repayment programs. Others charge fat upfront fees, spend their executives even fatter salaries and pocket much of the money that could be going to spend off creditors. An increasing number target people who aren't even late on their payments, but who are merely disgruntled about their interest rates.

The worst aren't credit consolidation services counselors at all. Usually billing themselves as specialists in "debt settlement," they promise to help you get rid of the debts for pennies on the dollar -- after you pay an upfront charge that can be $3,000 or a lot more. Usually, through the time I hear about these companies, they've already absconded with people's cash, disconnected their phones and set up shop somewhere new having a new name. 

Who needs credit consolidation services counseling?

Obviously, all these credit consolidation services outfits are finding lots of eager clients. Americans' credit card debt loads have been running at record levels, and bankruptcies are high.

It's hard to obtain an accurate bead on how numerous people signed up for credit card debt repayment plans through credit consolidation services counseling providers. Of those in credit card debt repayment programs, said Lydia Sermons-Ward, spokeswoman for that National Foundation for Credit Counseling, about half were expected to successfully complete their plans. The other half was expected to drop out, with some of those filing for bankruptcy.

Usually, credit consolidation services counseling services negotiate reduced payments with credit-card firms and other lenders, and then make the payments utilizing a check or electronic funds transfer sent to them through the consumer every month.

Most from the credit consolidation services counseling services' fees are paid through the lenders themselves, which send back towards the services a portion of the payments received. This has led some critics to charge that credit counseling is just a tool from the lending industry.

The payment system, known as "fair share," has definitely encouraged the growth of credit consolidation services counseling services. And some agencies, driven by competition, are now openly courting buyers who haven't fallen behind on their debts by promising lower interest rates. This development has angered credit-card companies and frequently hurts buyers, who may find out as well late that such programs can hurt their credit ratings and are frequently unnecessary.

Are you in danger?

So let's make this clear: If you're in a position to pay your bills and are current on all your accounts, you nearly definitely don't need credit consolidation services counseling. If your interest rates are as well high, you generally can negotiate a lower rate with your credit-card companies just by asking -- or threatening to move your account elsewhere.

Here's whenever you may think about full-scale credit counseling:

You can't pay the minimums in your credit cards.

You are consistently late paying 1 or a lot more of your regular bills.

Creditors and collection agencies are hounding you.

Your efforts to work out reasonable repayment programs with your creditors have failed.

Be warned: If you're too far in credit card debt, credit consolidation services counseling might not be able to aid. There are limits to how little your creditors will accept, and a credit counseling support may not be able to cut your obligations enough to either give you breathing room or get you out of debt. If that's accurate, bankruptcy might be the very best of bad options.

Your obligations also shouldn't stretch on for many years. The typical strategy takes two to four years to complete. Responsible credit counselors say bankruptcy is generally the better option if the repayment would take more than five years.

What to watch out for

Once you've decided you want credit counseling, you ought to investigate the debt consolidation organization or support carefully prior to signing up. Red flags to avoid include:

Large upfront fees. Consumer Credit Counseling Providers typically charge a $10 set-up fee. If you are paying a lot more, you might be the one who's getting set up, unless you are getting extensive and personal cash coaching that could justify the fee.

No accreditation. Legitimate credit counseling firms are affiliated with the National Foundation for Credit Counseling or the Association of Independent Customer Credit Counseling Agencies.

Delayed or missing obligations. Some firms pocket your very first months' payments as a charge, rather than passing the cash on to your creditors. Missing obligations can hurt your credit rating. Discover how much of every monthly payment is going for your creditors, and when it will be sent to them.

Unrealistic promises. Some companies falsely promise that you can settle your debts for small or no money, without hurting your credit rating. Legitimate credit counseling services help you spend back what you owe, albeit at reduced interest rates, and acknowledge there may be some affect in your credit rating and ability to obtain new credit.

What credit consolidation services counseling can do to your credit.

Here's an additional controversial topic. You might have heard that credit consolidation services counseling will trash your credit score report or even that it's "worse than bankruptcy." Neither is really true.

Credit counseling may have some effect in your credit, or it may have none whatsoever. Some creditors may not wish to do company with you following you've completed your plan, but others will.

Contrast that having a bankruptcy, which is viewed by almost all mainstream creditors as a huge negative in your credit score report. These creditors, who prefer to deal with consumers with good credit score, usually won't do business with you for that 10 many years the bankruptcy remains in your file.

What happens to your credit score during counseling largely depends on how your lenders report your account to the credit bureaus.

First USA, the credit-card giant, reports its customers as delinquent on their bills until they make 3 consecutive payments of the new minimums negotiated by their credit services, stated spokesman David Webster. Citibank, by contrast, merely adds a note to the credit bureaus' files that the customer is enrolled in credit counseling.

Being reported as late or delinquent can definitely hurt your credit score, the three-digit number widely utilized by creditors to determine creditworthiness. A easy notation about credit counseling probably won't. The credit score formula used by most creditors, recognized as FICO, now ignores any reference to credit counseling that may be in your file, stated Craig Watts, spokesman for FICO creator Fair Isaac & Co.

Even some lenders that were traditionally suspicious of credit counseling have loosened their stance. More mortgage lenders are willing to lend to individuals who have successfully completed repayment plans, stated mortgage broker Allen Bond, president of the California Association of Mortgage Brokers' Southern California chapter.

Some creditors say they even view credit counseling as an encouraging sign that a customer is getting his or her debts under control. Citibank, the largest issuer of credit cards, says individuals who have fallen behind on their payments frequently improve their status in the company's eyes by enrolling in -- and sticking with -- a debt repayment plan.

"We always viewed that being a positive," stated Citibank spokeswoman Maria Mendler. "We've seen that for individuals who enter these programs, there's a significantly reduced rate of default."

That said, there are still some creditors who refuse to deal with anyone who has enrolled in credit counseling. And if you fell behind in your obligations prior to you entered credit consolidation services credit counseling, you'll discover those late payments will still affect your credit score score even following you've paid off your debts.

As you can see, you will find no easy answers for people who get in trouble with credit. Once you're there, make sure to evaluate your options carefully, and don't make a bad situation worse by choosing bad credit consolidation services.

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