How to Be Aware of What Credit Counselors and Consolidators are Really Offering
This is a guest post from Matt B. Matt writes about all aspects of personal finance at Financial Methods. Please visit the site and let him know what you think.
If you are at a point in your life where you have realized that the debt you lug around behind you weighs you down too much, good for you. If you are stuck at the beginning of the battle and not sure where to go next, just know that there are plenty of options. One of the many routes many people take to chisel away their debt are consolidation or counseling services. While spending more than you make is all too easy, and getting out of debt will likely be a long and arduous battle, many of these companies are simply out to make a profit at your expense.
While there are plenty of “legitimate” consolidation companies who may offer you options that are attractive, the truth is that there is not much that these companies can do for you that you can not do for yourself. Allow me to elaborate.
Glorified “Middle Men”
The claims that these companies make are often exaggerated, or outright lies. They may tell you they can lower your monthly payment. While this may be true, they may very well be stretching your payment schedule to make the payment less. Would you rather pay $50/month for 5 years, or $43/month for 6 years? It is this seven dollars (give or take) that keeps you on the hook for another year, just for not taking care of business yourself. Granted, the hypothetical payments I just used would only be on a balance of $3000, but you get the idea. Many “credit counseling services” or consolidation firms do nothing more than taking your payment, and allocating it to your creditors. If you can not plan this yourself, you probably need more help than I can offer.
Higher Payment
If you accept a payment re-structuring from one of these companies, do not be surprised when you have to pay for their services. It will be difficult (but not impossible) to find one of these companies that is not-for-profit. This will be conveniently added to your monthly payment to them, so you will probably not even notice unless you are digging through your agreed upon terms and conditions or carefully examining your statement. (If they send you one).
Paying For Structure
If you can not set up a payment schedule yourself and decide to use a company to consolidate your debt, you may be doing little more than paying for them to organize your bills. If you are in so deep that you are confused as to where to start, maybe one of these companies will be able to help you out. Although I do not recommend it, if you want to pay for organization, these companies may actually be for you.
See, it’s not all bad!
Looking For a Profit
Always, always remember…these companies are out to turn a profit. Before you agree to a consolidation plan, settlement, or just a payment plan, carefully review and completely understand exactly what you are paying for. While there are companies that charge little to nothing to help you eliminate your debt, many will bombard you with long-winded agreements and terms that you do not understand fully. Do not take a counselor at their word! Many of these people work on commission, and that means that they will tell you whatever they think you want to hear in order to keep you interested in their plan. If for some reason you do miss a payment or default on the agreement, the repercussions can be more devastating than bankruptcy may have been.
Credit Score Complications
Many companies will claim that consolidation with them will have a positive impact on your credit score because you will once again be making regular payments. This may not be entirely true. Often, just being on a consolidation plan will show on your credit report. This can be a good or a bad thing. It can be good to potential future creditors that shows them you have the ability to ask for help and the will to pay off your debts. It can also be bad, making potential future creditors view you as a high risk. If this is the case, your interest on extended credit will likely have a higher than normal rate. Even if this only lasts for a few years, it can cost you thousands in interest.
While all of these are considerations you should put a lot of thought into before entering into an agreement with a counseling service or consolidation company, everyone is at a different place with debt. You may have a mountain in front of you that you just can not deal with. Or you may just be dealing with a nagging debt that needs a more structured plan of attack. By no means am I trying to dissuade anyone from contacting companies and services that may be willing and able to help. Conversely, I do want consumers to know what they are getting themselves into before committing to a multi-year contract.
One more thing: If it sounds too good to be true…it is.
Note from Jack at MYC: Matt brings up some excellent points about being discerning when seeking help from a debt consolidation firm. It’s important to remember that a debt loan or consolidation loan is, after all, just another loan and will show up on your credit report. Note, however, that there are some credit counselors that do not always recommend debt consolidation – if all you receive from your counselor is advice, it will not appear on your credit report. That being said, watch out: as demand for debt consolidation rises, so too does the opportunity for the unscrupulous to make a quick buck. Don’t fall into their traps.
Anyway, thanks again to Matt B. for a great post. Be sure to check out Financial Methods, which is hosting a guest post from yours truly “What Your Credit Card Says About Your Personality Type.”
Photo by MeKnits
Related posts:
- Shedding Debt vs. the Credit Score
- The bad credit repair guide
- Credit Counseling Services: A Primer
- A Tale of Two Lenders
- Is Credit Repair for you?
