Wednesday, May 8, 2002

The Dangers of Credit Counseling

The Dangers of Credit Counseling

Many consumers turn to credit counseling to get help managing debt. If you have gotten behind on bills, or have more debt than you can handle, this may be an option for you. Credit counselors work with you to help you get your creditors paid off, many times getting reductions in interest rates or other concessions. But remember, not every person claiming to be a credit counselor has your best interests in mind.

Counselors Can Charge High Up-Front Fees

    A reputable and legitimate credit counselor may not charge any fee for setting up your repayment plan or interviewing you. If they do charge an up-front fee, it should be around $50, which is reasonable for the work that they do. Some of the less respectable credit counselors charge much higher set-up fees, often up to 3 percent of your total outstanding debt. Be very careful of a company that wants to charge you that much before they have even done any work.

Watch For High Maintenance Fees

    A member of the National Association of Credit Counselors can only charge $12 or less per month for maintenance of your account. A less-than-honest credit counselor may charge a fee as high as the first month's debt payments as well as high ongoing monthly fees. Also, just because a credit counselor is a non-profit agency does not mean that the fees they charge are reasonable. Remember, fees you pay the counselor means less money available for you to pay off your debt.

Creditors may not get paid

    Many consumers find out after the fact that their credit counselor has made payments to their creditors late, or not at all. Late payments will cost you money with your creditors in late fees, in addition to doing more damage to your credit score. Missing payments may be difficult to track down after the fact. If you use a credit counselor who is making your payments for you out of money you provide, make sure that the bills and statements are still coming to you personally so that you can verify the correct payments. Also, check the references of a potential credit counselor before you use them. Ask for the names of his last three clients, and make sure that they were dealt with honestly.

Using A Counselor May Damage Your Credit

    A credit counselor's effect on your credit will vary. Many banks will still do business with you, figuring that you are dealing with the trouble and moving on. Some lenders view using a credit counseling service the same way that they view a Chapter 13 bankruptcy; they see you as a borrower who could not make your payments unless you had outside assistance. If you had severe delinquencies when you began using a credit counselor, the worst damage to your credit may be done already because of those delinquencies. Therefor, in this instance, a credit counselor may help your credit look better.

Counselors May Delay the Inevitable

    Some people are not able to complete a credit counseling and repayment plan. They may not have income enough to make the required payments, or there may be other issues. Some credit counselors will do everything possible to keep you from filing for bankruptcy, even in situations where it is the best solution to the problem. You may work for years to pay off creditors and counseling fees, only to file for bankruptcy and discharge the remaining debt. Had you done this sooner, all of those payments could have been used to rebuild your financial life after the bankruptcy.

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