Most people don't know this, but a bad or shady debt reduction company can put you in a worse financial situation than when you started. In many cases, it's better to file for bankruptcy than to work with a credit counselling company. There is a lot of confusing information out there, so you need to know the truth about these businesses.
Credit counselling isn't always what it seems to be, so beware!
When you first start out, you talk to a counsellor about all your debts. They talk to each of your creditors and ask them to lower your interest rates, which lowers your payments. You work together to make a strict budget. They make sure you stick to this budget by asking you for one lump sum each month, which they use to pay your bills.
The sad thing is that this happy picture hides the truth. Credit counsellors will, for a fee, ask your credit card companies to lower your interest rates. However, you can do this yourself. Yes, they will help you make a budget for a fee, but you can do it on your own. 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 the same thing yourself. You can do it better, though.
When you're in debt, the last thing you need is a credit counselling service that charges you a lot of money every month to do things you can do for free yourself. If you don't pay the new fees for your credit counsellor, you'll quickly lose any money you save from lower interest rates. Does that sound like good advice about money to you?
Driven by the success of their clients or by their own profits?
A few years ago, when credit counsellors were just starting out, a small number of them really helped their clients. Before the market blew up, many credit card companies thought that hiring a professional credit counsellor was a good idea. Creditors were willing to lower interest rates and work with customers in counselling in other ways to help them get back on track.
No longer. Credit counselling companies exist today, but not to help people get out of debt, but to make money for their owners. In fact, some companies that help people get out of debt aren't really there to help them with debt management plans. Instead, they are just fronts for bankruptcy lawyers or home equity mortgage brokers.
Don't let yourself be fooled into thinking that a credit counsellor who works for free is better than one who works for money. In fact, recent federal investigations have shown that many of these non-profit companies are owned by the same people who own their for-profit "competitors."
The industry of credit counselling is not regulated, which means that there is no central set of rules that all companies must follow. Once the sketchy credit services opened, the credit card companies shut down. In fact, it's harder than ever to get the interest rates on credit cards to go down. This mess is caused by credit counsellors, not by people who use credit cards.
It all adds up...to bills that are even higher.
Some companies that help people consolidate their debt have rules about what their clients can and can't do. For instance, some companies will never let you open a new credit account, no matter what. If the family car breaks down for good, you might not be able to buy a new one. The average debt-reduction plan lasts at least three years, which means that for at least three years of your life, strangers will limit your spending.
If you hire a credit counselling service, getting a loan for a new car might be the least of your worries. Think about how important it is to pay your bills on time. When you miss payments more than once, it hurts your credit score, which means you'll have to pay even more in interest on a mortgage or student loan in the future. How do you know that your counsellor is paying attention to the dates you need to meet? Many of these businesses have been caught paying their bills months late over and over again. Their victims never found out until it was too late.
Then there's the simple matter of math. Surprisingly, the payment you make each month to your credit counselling company might not even cover all of your minimum payments. After the counsellors take out their own high fees, they decide how to pay your bills. Some of your cards might not be paid off for months because you put most of your money on another card.
At best, this will hurt your credit score and cause you to pay multiple late fees. At worst, it could lead to legal action against you and make your credit worse than it was before. Filing for bankruptcy would have been faster, easier, and much cheaper.
Dealing with debt can be stressful, but giving someone we don't know such a big part of our lives is a big risk. Getting help from someone else is great, but not if it costs you hundreds or even thousands of dollars that you could have used to pay off your debts.
