Debt counseling - things to look out for
Credit card debt is swallowing you alive.
Despite your best efforts, you seem to keep falling further and further behind. You're now getting
hit with late fees and over-the-limit fees. Your balances seem to be going UP not down.
You're at your wits end. You need help.
Each day, we're bombarded with commercials and advertisements from companies offering to help you
manage your debt. Many are "non-profit" companies (if they're not interested in making money, why
do they keep advertising? And where are they getting the money to pay for the commercials?). Some
companies promise to repair your credit, or to negotiate a reduction in interest rates or to get
your outstanding balance cut in half. Beware!
Warning signs of a bad debt counselling company
Not all debt counseling companies are bad. Those that have been around for a long time truly are
non-profit, and want to help you with your debt problems. However, as with everything, there are
unscrupulous individuals who are more interested in separating you from your money than they are
in providing you with sound (and legal) financial advice and help.
Debtsynergy.com has a list of warning signs. Here are a few of them.
- Require payment by money order or cashiers check
- Require account numbers before providing you with a quote
- Refuse to send you a client agreement by mail
- Advise you to include the IRS (IRS debt must be handled separately)
- Refuse to quote firm interest rates and payback periods
- Advertise cutting your minimum payments in half
- Offer to negotiate a reduction in your outstanding balance
The list can be seen at the Debtsynergy website.
The unscrupulous companies try to get you to include the low interest debts that you already have
in order to show you a "blended" lower rate. The rates of the high interest debts haven't changed,
but they can make it look like they've done something by quoting a "blended" rate.
They suggest that they can get the minimum monthly payment cut in half (down to 1% of the
outstanding balance). However, this is no longer possible. The last two banks offering this low
minimum payment plan stopped doing it in 2003/2004.
They suggest that they can negotiate a reduction of your outstanding balance. It's true that
some creditors will write off part of the balance; this is not a good thing. First, it'll show
up in your credit report for 7 years, and second, the amount of the write down will show up
as income for tax purposes. You'll end up paying income taxes on the amount of the write down!
One expert even goes so
far as to show that you'd be better off defaulting on your debts than to use a service to
negotiate a write down of your outstanding balance!
What you can do to get lower interest rates
Legitimate companies can negotiate with your creditors to get lower interest rates, in order to
reduce the amount that you have to pay each month. But you can
do this yourself for free! Why pay someone hundreds
of dollars to do something that you can do for yourself?
If you feel, somehow, that you can't possibly negotiate with your creditors, then a credit
counseling service will do it for you. Be aware that you'll be charged fees ($30 or more) per
account every month! Is your self-doubt worth paying hundreds of dollars a year? Given the
number of bad counseling companies out there, it's hard to justify the costs and the risk. If,
despite this information, you must avail yourself of the services of a credit counseling
service, be very careful in choosing the company you will deal with. Do research on the
companies you're considering. Make sure that they're members of the National Foundation for
Credit Counseling. Remember, a bad choice can lead to a mountain of problems in the future.
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