National Association of Responsible Lending and Investment,
Most people don't know it, but a bad
or shady debt reduction company can actually land you in a worse spot
financially than you were in the beginning. In fact, in many cases filing
bankruptcy is preferable to working with a credit counseling company. Given
the amount of confusing information out there, it is critical that you arm
yourself with the truth about these businesses.
Counseling Isn't Always What It Appears
Tip for fast debt relief:
People with cash crunch problems are often finding that quick payday loans make a whole lot of sense. For example, instead of
dealing with credit counselors you take a quick payday loan so you can
soften your debt crisis right away. You can pay off your smallest loan
(freeing up your cash flow) or you can approach a creditor with extra funds
so you can negotiate better terms or some kind of grace period.
A quick payday loan may give you
just the boost you need to get the debt concessions you need. Now, you are
in charge of the situation again instead of paying a credit counseling
company to approach your lenders for you.
How Credit Counseling Works
When you first start out, you go
over all your debts with a counselor. They contact each of your creditors to
lower your interest rates, which lower your payments. Together, you develop
a strict budget. They hold you to this budget by asking for one lump payment
from you each month, which they then use to pay your bills on your behalf.
Unfortunately, this sunny scenario
hides the real truth. Yes, for a fee, credit counselors will ask your credit
card companies to lower your interest rates—but you can do that yourself.
Yes, for a fee, they will help you develop a budget—but you can do that
yourself. Yes, for a fee, they will take one large payment from you each
month and use it to pay some of your bills—but you can do that yourself,
too. In fact, you can do it better.
When you're in debt, the last thing
you need is a credit counseling agency charging you high monthly fees for
performing tasks that you can do yourself for free. Otherwise, any savings
from lower interest rates is quickly lost in new fees for your credit
counselor. Does that sound like good financial advice?
Driven By Client Successes, Or By
Years ago, a small number of newly
created credit counselors actually made a positive difference in the lives
of their clients. Before the industry exploded, many credit card companies
considered professional credit counselor to be a step in the right
direction. Creditors were willing to lower interest rates and make other
compromises to help customers in counseling to get back on track.
No longer. Sadly, today's credit
counseling companies exist to create profits for their owners—not to help
customers get out of debt. In fact, some debt reduction companies are not
actually dedicated to helping consumers with debt management plans at all;
rather, they serve as fronts for bankruptcy attorneys or home equity
Don't be misled into believing that
a non-profit credit counselor is better than a for-profit one. In fact,
recent federal investigations have revealed that many of these non-profit
companies are actually owned by the same people who own their for-profit
The credit counseling industry is
unregulated, meaning there is no set of central standards that companies
must follow. Once the shady credit services opened their doors, the credit
card companies closed theirs. In fact, it is now harder than ever to get
credit card interest rates lowered. Credit counselors, not credit card
users, are to blame for this situation.
It All Adds Up… To Even Higher
Specific debt consolidation
companies have specific guidelines as to what their clients are and are not
allowed to do. For example, some companies do not allow you to open any new
credit accounts under any circumstances. If the family car finally breaks
down, you may not be allowed to get a new vehicle. The average debt
reduction plan lasts at least three years — that equals at least three years
of your life, where total strangers restrict your every expense.
Whether or not you can take out a
new car loan may be the least of your concerns after hiring a
credit-counseling agency. Consider how important it is to pay your credit
card bills on time. Multiple late payments hurt your credit score, which
means even higher interest rates on a future mortgage or student loan. What
guarantee do you have that your counselor is paying attention to your due
dates? Many of these businesses have been exposed for repeatedly paying
bills months late. Their innocent clients never knew until it was too late.
Then there is the matter of simple
math. Shockingly, the monthly payment you make to your credit counseling
company may not even be covering your total minimum payments. After the
counselors subtract their own hefty fees, they then pay your bills at
their discretion. Some cards could remain unpaid for months as most of
your money is put on another card.
At best, this means a lower credit
rating and multiple late fees; at worst, it means legal action against you
and worse credit than you had originally. It would have been faster, easier,
and much cheaper to file bankruptcy instead.
Dealing with debt can be stressful, but turning such an important aspect of
our lives over to people we do not know is a big risk. It's great to get outside
help, but not if it costs you hundreds or even thousands of dollars that would
be better spent on paying off your current balances.