5 myths about credit counseling
When it comes to dealing with debt and clearing your credit, what you don't know really can hurt you.
Working with a credit counselor won't ding your credit score. Honest. Yet some people seem to think it will, according to a survey from the National Foundation for Credit Counseling.
The fact is, credit counselors don't report to the credit bureaus. Seeking help from a professional, nonprofit credit counseling agency can help you fix what's wrong with your finances -- which will ultimately improve your credit score.
Besides: How does your credit report look right now?
"What about the eight months you haven't paid your Macy's card? Dings to your credit score already exist," notes NFCC spokeswoman Gail Cunningham.
Five common themes emerged from the 2013 survey, including the notion that asking for help would damage your credit score. The others are:
- "Credit counseling would cost too much." No NFCC agency can deny service based on inability to pay. All members offer sliding-scale counseling, which may mean "free."
- "Debt settlement or bankruptcy would be easier and cheaper." Although either option may be the right choice for specific situations, you should always investigate other tactics. Both settlement and bankruptcy typically have negative consequences, including but not limited to lawsuits, sharp impact on credit scores, and the fact that debt that's forgiven is subject to taxation.
- "Counselors offer only advice, not solutions." The solution must come from the debtors, but counselors help clients develop written plans for short- and long-term goals, and then negotiate with creditors for lower monthly payments, lower interest rates, and lowering/cessation of any fees.
- "I don't know who to ask." The NFCC recommends its member organizations -- naturally! -- but also suggests checking with the Better Business Bureau and your state attorney general's office for any unresolved complaints involving counseling agencies.
That last one is particularly serious. Shady and sometimes criminal "debt relief" companies popped up during the recession and its aftermath, promising fixes that ranged from the fraudulent to the impossible.
Even people who weren't snookered by such companies may know folks who were -- and that makes them wary, according to Cunningham. They're not sure of the differences among terms like credit counseling, debt management, debt settlement and credit repair.
"There is a lot of consumer confusion out there," she says. "That's led to a lot of consumers who aren't willing to do anything to fix their finances."
No easy solutions
People should be wary because real financial fixes don't happen overnight, says MSN Money columnist Liz Weston. No secret loopholes exist to allow companies to solve your money woes instantly.Credit repair is not the same as credit counseling. Repair is for bringing up your credit score. Counseling is to help you pay off debt and get control of your finances. If all you want is to fix your FICO, Weston suggests these DIY resources:
- Experian Credit Educator: For $30 you'll get a 20-minute, one-on-one phone call with an agent who will walk you through "credit repair components" and offer information on credit management in general. (Take notes, and don't waste any of those 20 minutes with idle chitchat.)
- Credit counseling agencies: Weston recommends going through the NFCC for counselors in your area.
- Buy your FICO: Pay $20 at MyFICO.com to get an explanation of the reasons behind the number and suggestions for improving it.
Reputable credit repair companies do exist, Weston notes. Ask mortgage professionals or real estate agents for referrals, and check the companies out with the Better Business Bureau.
Don't sign with a company that asks for money upfront or refuses to provide a contract that spells out exactly what will be done, how long it will take and how much it will cost. Companies should also clearly explain your legal rights, and provide three days to cancel with no fee.
"There are plenty of companies that will charge you a lot to do very little, or nothing at all," Weston says. "But some can provide a legitimate service…by helping people through a process that they could do themselves, but may not want to."
Doing it yourself
It's possible to repair your own credit, over time, by squaring your debts and keeping your financial nose clean. But a credit counseling agency can ease the process -- especially if you're deeply indebted -- by negotiating those lower interest rates and fees. With that kind of help, repayment should be less stressful and faster.
"Faster," however, is a relative term. It will take time. Depending on how much you owe, it could take up to several years to satisfy your financial obligations. It works only if you work it.
One of the things you'll have to do if you go through an agency is cut up your credit cards -- and sometimes that really hurts. Cunningham says that clients sometimes shed actual tears as they wield the scissors. No pain, no gain.
Readers: Have you ever gone to credit counseling?
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