Credit Counseling and Your Credit

You may have seen the ads on television - non-profit agencies set up to help you escape debt by offering a credit counseling service. They promise to "consolidate" your debt into one lower payment at no cost to you. The way they get paid is through "donations" from your creditors. They negotiate with all of your creditors to lower your interest rates and payments. You pay the counselor the sum of your creditors' payments. They send the payments to the creditors. In exchange, the creditors pay the counselor a donation.

Sounds like a good deal, right?

Before committing to such a service, you must understand what their purpose is. In order to attain a non-profit status with the IRS, they must provide actual educational services to consumers to help with their debt management, budgeting, and so forth. Currently, the IRS is auditing many of these organizations. So far, they have found that these credit counselors do not provide such a service and only exist to receive fees from creditors. They have revoked the non-profit status from several companies.

These companies are called "predatory credit counselors." They take your monthly payment, and instead of shipping it off to your creditors, they pocket the money for themselves.

These bad apples have put the consumer in a real dilemma. The new United States bankruptcy laws will require debtors to enter a credit counseling program before actually entering bankruptcy.

In theory, credit counseling can be a great service when executed correctly by all parties involved. That is, the counselors actually provide an educational service and the consumer actually learns and implements what they're told. This can pave the way to a secure, debt-free future. What can you do to avoid becoming a victim?

First, find out if there are any fees charged to you by the counseling agency. Even if they're non-profit, they may still charge you for their services up-front, such as a setup fee. A reputable company won't charge you exorbitant amounts for fees, as that would defeat the purpose of seeking their assistance in the first place.

Next, try to ascertain how your counselor is paid. If they make a salary, you're in good shape. If they work for commissions or earn bonuses based on steering you towards more expensive debt consolidation programs, be wary. Good counselors will do what's best for your pocket, not theirs.

Just because the credit counselors work with creditors doesn't mean creditors work with that particular company. When a consumer enters a credit counseling program, the counselor sends a proposal to the creditor. The creditor then has the option of approving or rejecting the proposal. If rejected, there is nothing further that can be done with that particular creditor. You'll have to negotiate with them on your own. Call your creditors directly and make sure they will accept the proposal first.

Get all promises and terms made by the counselor in writing. A verbal promise is not binding. As well, make sure the counseling agency sends monthly reports that outline every transaction; how much you paid them and where the money is going. Verify that your money is actually paying your creditors, and not your counselors.

How does entering credit counseling affect your credit? It depends on an individual lender as to how they view credit counseling. Your counselor will have you believe that it's a positive because you're taking proactive steps to get your debts in order. However, many lenders view credit counseling as the final step before bankruptcy. Entering counseling might signal to them that you have a debt management problem, and suspect that you may default on their loan. In fact, many lenders will deny your application outright if you're currently in a debt management program, as if you were in an non-discharged bankruptcy.

If you're in a situation that might require credit counseling, or even bankruptcy, check your credit report first. Make sure that your report is completely accurate. If necessary, take steps to increase your credit score. You might benefit more from taking out an actual loan to consolidate your debts than to enter debt management and bankruptcy. You can only get a loan if your scores are high enough. Make an effort to raise your scores, get a consolidation loan, and make sure you never get into the same debt situation again!

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Credit Expert Frank Bruno
http://www.DisputeDemon.com
http://www.CreditScoreBooster.com