The Process
Credit counseling is different from debt settlement in that counseling rates, payments and interest charges are negotiated with a lender, while settlement is agreeing to pay a lesser sum than owed outright to the agencies. Credit counseling is usually negotiated with a third-party--an agent who speaks on behalf of the borrower and, for a fee, attempts to reduce the amount borrowed and eliminate interest charges to avoid bankruptcy.
Effect on Credit Score
True credit counseling will not adversely affect a credit score or report. Visit Resources below to find reputable credit counselors to guide you through the process. Sometimes, a lender will attach a disclaimer on your credit report alerting future lenders that you are in credit counseling. While going through the process, however, generally the lenders stipulate that further credit cannot be obtained until previous debts have been repaid.
Disreputable Agencies
Some credit counseling agencies are out to scam borrowers. In the worst cases, these agencies simply take an up-front fee for services and then allow you to sink heavily into default--thereby eliminating all other options--before stepping in and working with the credit agencies to reduce payments and interest. In this fashion, these predatory companies force their customers into a corner to do business with them.
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