If you’ve gotten to where your credit card debt and other debts are too much for you to handle, you might have considered a credit repair company. These agencies advertise everywhere, from pop-up ads to TV commercials. Everywhere you look there are plenty of credit wizards just waiting to reduce your debt and make your credit score sky-high!
As with most things that look too good to be true, most of these agencies’ claims are bunk. In some cases, they can make things worse than they were to begin with, damaging your credit score and thus your eligibility, — though they always still collect their fees from you, naturally. Now, there are legitimate credit-repair agencies, and we should first talk about how to tell the good ones from the bad ones. A good agency is one that is a non-profit organization (which doesn’t mean they don’t charge for their services). A good agency will counsel you on how to manage your finances, work with you in creating a personal budget, and give you information materials, workshops, and other aids free of charge. Generally, they will appear to actually want to help you get your life back on track — whereas the shady operators clearly just want your money. Now, there are legitimate credit-repair agencies, and we should first talk about how to tell the good ones from the bad ones. A good agency is one that is a non-profit organization (which doesn’t mean they don’t charge for their services). A good agency will counsel you on how to manage your finances, work with you in creating a personal budget, and give you information materials, workshops, and other aids free of charge. Generally, they will appear to actually want to help you get your life back on track — whereas the shady operators clearly just want your money.
Legitimate operations will also have no problem whatsoever in explaining how they operate, how they pay their agents (by commission, or by salary?), and to make the whole process transparent for you. They have nothing to hide, because they’re non-profit organizations. A good agency will give you free budget advice and look at your current situation, also for free. Bad ones will charge a fee just for analyzing your debts, and will then try to talk you into a Debt Management Plan.
Beware of the Debt Management Plan! It can be effective, but it’s very difficult, and it should only be a last resort. If your counselor is recommending it right off the bat, say thank you and look elsewhere. The way it works is that you, your creditors, and the counselors work out an arrangement. You pay a certain amount of money each month to the counselors, who then distribute it among the creditors based on arrangements they’ve agreed on. Sometimes the lenders will have waived late fees or reduced the interest rate in exchange for you committing to the Debt Management Plan.
So what’s the problem? Well, for one thing, these plans typically extend over several years. And in the meantime, you can’t apply for credit. What’s more, there’s a chance some of your creditors won’t participate, and then you’ll still have to pay them as usual in the meantime. Another thing to look out for: any credit counselor who promises to get all the negative info removed from your credit report. The only way to do that is to replace negative history with good credit history. That’s the only way your credit score will ever go up. A credit counselor has no more sway with the credit bureaus than you do; they’re governed by federal law in determining what to include on your report.
Some shady credit-counseling agencies push Debt Negotiation Programs, also called Debt Settlement Programs. Under no circumstances should you ever agree to this. What they claim is that they’ll drastically reduce the amount of debt you have, and that they’ll also scrub your credit report clean when it’s all over. These claims are false, and you mustn’t fall for them.
The way these hucksters work is, they tell you stop paying all your debts immediately. (You’ll still have to pay the counselors’ monthly fees, of course.) Once you’re late a few months, all your debts become marked as “uncollectible.” Once that happens, the creditors might agree to take a much lower repayment amount, just because they’d rather get something out of you than nothing. So your balance gets reduced — but your credit score is now shot from all those missed payments, and the IRS regards the principal that got eliminated as income.
You mention all this up front, and the credit counselor tries to assuage your fears. “Don’t worry,” they say. “When it’s all over, we negotiate with the credit bureaus and get all that negative information taken off your credit report!”
How do they do that? They take a shotgun approach: They file disputes against every single item on your credit report, including the perfectly legitimate ones. The credit bureaus are obligated to investigate every claim, and while they’re looking into it, they’re required to take the disputed items off your credit report. So while the investigations are ongoing, sure enough, your credit report will look great! That’s when the counselor declares “mission accomplished!” and makes off with your fees.
Then, when the credit bureaus conclude that all the information was accurate, it goes back on the credit report where it belongs, and you’re back where you started — with a credit score shot to pieces. And good luck getting the credit counselor to return your calls now!
An honest, legitimate credit-counseling agency can be a blessing, but you have to know how to spot the good ones from the bad ones. You can’t expect miracles. It took time to ruin your credit, so it’s bound to take time to rebuild it, too. Deal only with agencies that are legitimate, non-profit, and in good standing with the Better Business Bureau.
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