Credit Counseling: The Advantages and The Dangers

It is important to be careful when contemplating using a credit counseling service.   While there are many reputable services, there also are some credit-counseling companies that have horrible reputations.

However, credit counseling is now required before filing for bankruptcy.  They certainly are not all bad, but if you’d like help with your debt you should be aware of the advantages and disadvantages of using a credit counseling company.

Positive Features of Credit Counseling

  1. They can help you deal with creditors because they tend to have more clout with them than you would. Some creditors are more willing to negotiate pay-offs and payment plans with credit counselors. You might get a better deal and more breathing room with a credit counseling service.
  2. They may be able to help you to consolidate your payments. Many firms will consolidate your payments into one payment each month. You’ll be making a payment to the counseling company. Understand that the credit counseling firm must then make all the individual payments for you.
  3. They may be able to help you to get new credit. As part of your credit counseling, it’s common for new credit to be secured for you. They’ll go out and work to have your credit applications approved.
  4. An end to the harassment. When you’re put on a repayment plan, the debt collectors will leave you alone. Remember that you can do this yourself by simply making a request in writing.

A reputable and honest credit counseling service can be helpful. There are many potential advantages to utilizing the expert assistance they can provide. But there are also several possible negative consequences.

Pitfalls of Credit Counseling

  1. They might take you money but not actually pay your bills. There are many complaints every year of credit counseling companies taking your money and then failing to make the agreed-upon payments to your creditors.
  2. They often over-promise. Just like any other company vying for your dollars, sometimes the marketing is a little too good to be true. After the counseling company takes their cut, you might not be any better off.
  3. It’s possible they could make your credit worse. There is one tactic commonly employed that can have a negative impact on your credit score. The credit counselor may advise you to stop paying on your debt and instead put the payments into an account.
  • Your payments would accumulate until a large enough sum is available, and then the counselor would approach your creditors with offers to pay off the debt at a reduced amount.
  • During this process your credit will suffer due to the non-payment.
  • The account used to store the money is under the control of the counseling firm. You need to know that you can trust them.

The potential pitfalls are serious. It’s very important to do the necessary legwork to locate a reputable credit counseling service.

Don’t be fooled into believing that a just because a service has non-profit status it must be reputable. Understand that being non-profit is primarily about not showing a profit at the end of the year. Paying bonuses and higher salaries can accomplish this feat.

Ideally, you’ll be able to find a counseling service in your state that you can visit in person. Checking with your state Attorney General is an effective way to see if any complaints or legal action have taken place. Doing an online search is also likely to turn up any negative reviews or complaints.

Inquire about the services offered and the fees. Ask how the employees are paid. Are they compensated more for signing you up for certain services? Get everything in writing. Verbal promises are likely to be conveniently forgotten.

Credit counseling can be beneficial or counterproductive to your goals of reducing and eliminating your debt. Find a reputable credit-counseling firm by doing the necessary research. Be sure your financial situation will move in a positive direction.

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