Credit Counseling and Credit Consolidation
Almost anytime you turn on the TV or check out your inbox these days you are inundated with advertisements for credit counseling or credit consolidation. Recently bankruptcy laws changed in a way that made it much more difficult to file chapter 11 or 13, and that has lead to an increase in people looking for other ways to manage their debt. Credit Repair and Consolidation companies are circling the waters like sharks.
These companies offer to lower your payments and improve your credit score, often times at no cost to you. Does it sound too good to be true? Probably because it is. These companies are not offering long term solutions, just short term cover ups that hurt your future and put money in their pockets. As the old saying goes, you can put lipstick on a pig; but it's still a pig.
If you're in trouble with your credit, it's because you've outspent what you have earned: plain and simple. Now that's nothing to judge yourself about, but it is something to accept and learn to control.
Since you got into the situation by over indulging wouldn't it be unlikely then that you could fix the situation with no work and no penalty? That's like eating a whole chocolate cake and believing that you could burn off the calories by sleeping. The truth is that fixing your credit takes work and time, but that's not what people want to hear so the allure of the "quick credit fix" is strong. Let's take a look at some of the misleading statements these companies make:
We will provide you a free credit analysis and plan
Credit Repair companies offer you this free "analysis", which is in fact not an analysis at all, but often it is just them pulling your credit report (something you can do for yourself free). The problem is that you still wont understand the report or know how to fix it, here is where the scam kicks in. Now that they have the report they offer to sell you a "class" or "plan" that will then walk you through how to repair the issues on your credit. These "classes" often cost upwards of $500...Hardly a way to start solving you problems overspending.
We are a not-for-profit company
This statement is almost always true about the company sending you the offer. The company you call for your analysis then refers you to a company to "fix" the problem or sell you their products (classes or plans). You guessed it, the second company is for profit and is owned by the same people as the first company. This line is just a simple bait and switch tactic.
We will lower your monthly payment at no cost to you
This is another statement that is not entirely untrue...it's just not the whole picture either. What credit consolidation companies do is lower your monthly payments or total amount due with your creditors. They can do this one of two ways:
1. The most common way that these companies "help" you is by negotiating with your creditors on your behalf. What this really means is they get your bill collectors to agree to take less than the full amount you owe them and close their case with you. The problem with this set up is that this "negotiation" is marked permanently on your credit report and is sometimes as costly to your rating as non payment or a bankruptcy. It isn't solving the long term problem, it's just making it feel better temporarily. In the long run it will erode your credit which may cost you significantly more money.
2. Credit consolidation companies may also offer you or find you a loan for the same total amount, but a lower monthly payment. This way your creditors are paid off and you end up with a new "consolidated" loan payable to someone else. The trouble here is that you may have a lower monthly payment, but may owe that payment for many more months. For example, you may have owed a total of $500 a month that would take you 53 months to pay off, for a total amount paid of $26,500. A consolidation loan may be able to lower your payments by half (a line they often use) but if you have to make payments for 120 months you would still pay $30,000!!!
Consolidation also leaves another major problem: once the loan is "consolidated" many people go back to using their credit cars and overspending again. Because they only addressed the symptom (not the illness) they end up owing more than ever!
The Real Solution
The good news is that everything any legal "credit counselor" can do for a fee, you can do for yourself. Also, the only way to really solve the problem is to stop the cause: overspending, which requires us to learn about how the system works.
Over the next few columns we will walk through the process of reading a credit report and dealing with improving your score. We will also cover bankruptcy laws, refinancing plans and some solutions for any of you who really can't keep up with the bills.
As always I'm here to help, so I'd be happy to discuss these situations with any of you and even help build you a personalized plan. Until then...keep the emails, comments and questions coming.