If you've reached a point when your credit load has become too much to handle, you're probably finding yourself drawn to credit repair claims. From television commercials to online advertisements, it seems like everywhere you turn there is a new company specializing in fixing your credit score and help your crawl out of debt. These credit repair counselors are ready to slash your debt and boost your credit score.
As you might expect, not all of these companies are the heroes they claim to be. In fact, many credit counseling companies can leave you in an even far worse situation, after they've collected their fees, of course. To separate the good companies from the bad ones, let's start out by defining the reputable credit counseling organizations around today.
Ravi Shahani, a credit counselor with Consumer Credit Counseling, offers up the following description of a reputable consumer credit counseling company: "A non-profit organization that wants to financially empower its clients and help them gain control of their life through education and financial management." Companies that are not interested in just collecting fees are the one’s to go with. These companies will inform you on managing your money and your debts, they will help you develop and implement a budget, and generally provide you with free educational materials and workshops. Shahani describes how a typical case would work. "A person calls in and tells us they have too much debt," he says.
"We then analyze their situation and provide free budget counseling. If they are in bad shape with creditors, we may offer debt management." Shahani notes that if a client chooses debt management, they will be charged both an application and monthly service fee. If you're talking to a credit counselor, steer clear of the ones who want to charge you for budget analysis, or want to push a Debt Management Plan on you.
Can you manage without credit cards and improve your overall credit score
If your financial situation has become unmanageable, a credit counselor may suggest a Debt Management Plan (DMP). The plan is an arrangement between you, your creditors and the credit counselors. Through this program, you deposit money each month with the credit counselors to pay off your debt. They then use that money to pay your debts based on a schedule they have negotiated with the creditors, who may have agreed to lower your interest rates. Sometimes they may even waive certain fees in the hopes of recouping some of their money.
The Debt Management Program are effective, but generally are stretched out over a long period of time. By adhering to the payment schedule, you could find yourself debt-free by the end of the repayment period, which if your debt is high can be a few years.
However, you may find that part of the deal is that you cannot acquire new credit while you're cleaning up your record and trying to bring up your credit score. This program is generally the last resort for a credit counselor, and if they are truly reputable, it will come with a budget and advice on sound money management skills. If you pursue a DMP, make sure you know which of your creditors are participating in the program. Keep in mind; you'll still have to pay anyone not participating. Also, beware the credit counselor who wants money upfront or promises to remove negative information from your report usually is trying to get you into some sort of a scam. The good companies understand they'll be paid over time, and that only by making regular payments will your credit score begin to reverse itself.
Beware: debt negotiation programs to improve your credit score
Everyone knows that in life nothing comes for free. Keep that in mind as you begin to investigate Debt Negotiation or Debt Settlement Programs. Companies that claim that they can arrange to reduce the balance of your debt, as well as wipe all the negative from your credit report, usually have something to hide. First these companies, tell you to stop making payments to your creditors. They also will charge you a bunch of upfront fees, monthly fees, etc. After you've gone late on numerous payments, they will then contact your creditors and attempt to have your debt deemed as uncollectible. Once they've told that to your creditor, they may be willing to accept less than the amount you originally owed, hoping to collect something.
That's how you wind up getting your balance reduced. Unfortunately, your credit score will suffer greatly and the IRS will consider the principal that supposedly got wiped off the books to be income. So now you'll have yourself a new tax obligation.
But do these people really clean up your credit score? Temporarily only, these companies tend to just dispute everything in your report. In response to the dispute, the credit reporting agencies will remove all disputed items temporarily while they investigate. At that point, these scam operators will send you "clean credit reports. "Unfortunately, once the credit bureaus do complete their investigations and verify that the negative information is valid, they promptly replace the negative information.
Don't go for the easy money
A credit counselor can be an enormous help, you just need to be realistic about what they can accomplish. Expect them to guide and help you through a lengthy, disciplined process for getting your finances back in order. You should only deal with the ones who check out with the Better Business Bureau and offer you plenty of information about their company and the history of the organization.
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