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Credit Counseling – Salvation or Scam?

Financial Planning

April 2009

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Credit Counseling – Salvation or Scam?

Over the last two decades, consumer debt has been skyrocketing and so have the fortunes of the ‘so-called’ consumer credit counselors. How many times a day do you see an advertisement that promises to help you “pay only a fraction” of your accumulated credit card debt? They’re hard to miss because they are everywhere! The question is whether all these promises are just sales pitches to get you to pay for something you could get for free. This article is intended to help you make wise decisions and avoid being defrauded by those who would prey on your fears.

If you’re watching late night television and start seriously contemplating using the credit counseling agency that advertises (between the monologue and the first guest), take a moment and ask yourself some questions. Are you really in trouble financially? Are you having trouble making credit card payments? Do credit collection agencies drive you crazy with phone calls? Are you consistently late making regular payments (utilities, house payment or rent, etc.)? Is it because you simply don’t have the money? Have you spoken to your creditors and tried to work out payment arrangements you both can live with? Heard nothing but laughter on the other end of those calls?

If the answers to the foregoing questions are no, why would you want to spend time and money having a “credit counselor” negotiate a bill payment plan when you are already paying your debts? While you may have significant debt, if you’re already working a successful plan, why spend money to rework it?

If, however, you answered yes to one or more of those key questions, and might find it useful to deal with a credit counseling agency, how do you find a reputable one? You can start by talking to your local credit bureau. First look at verifying whether your potential counselor is accredited by one of the national agencies (Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling). Legitimate agencies will be affiliated with one of these associations. You can also go to these agencies’ home pages and search for affiliated counselors.

When you have identified some agencies you think might help, investigate them. Look at their websites and give them a call. Kick the tires and make sure you’re not talking to an agency more interested in fleecing you than freeing you from debt. A few things to look out for are:

  • Counselors that charge huge upfront fees. If you could afford to pay huge fees before any work is done, you probably wouldn’t be calling someone you don’t know for help!
  • Remember “if it sounds too good to be true, it probably is”. Beware of unrealistic promises. If someone tells you that they can settle your debt for next to nothing and without affecting your credit, wish them good luck in their future endeavors and go on to the next candidate. The fact is that there will be some impact on your credit and legitimate agencies try to help you pay back most or all your debt, not just a few pennies on the dollar.
  • Does the company have a history of making payments late, or even missing payments? If you are paying the counselor to make payments to your creditors, be certain that you know how much of your monthly payment will go to your creditors and when the money will be sent. That way you can check on your counselor to make sure they are holding up their end of the deal.
  • Whatever you do, don’t be taken in by companies that promise to clear your record for a small monthly fee. Whenever I see a sign that says someone can fix my credit for $50 per month, I suspect that what they are really fixing is their bank account. The only way to repair your credit is to act responsibly and pay your debts.

If you find that you do need to work with a credit counseling agency, be aware that different creditors view counseling differently. Some may tell you that bankruptcy is a far easier and less painful way to settle your debt. While that may sometimes be true, the fact is most creditors are far more willing to take a chance on people who actually pay their debt than people who try to avoid their obligations. In the current economy, most lenders view it as a plus when debtors try to work with them directly.

If you are having trouble making ends meet, don’t go for a quick fix that could simply put you deeper in the hole. If you think you need the services of a credit counselor, make a thorough search of reputable agencies before you settle on one. Don’t forget, your problems can often be solved by developing and following a sound debt repayment plan. If you need help structuring one, give us a call. We’ll be glad to help.

Have a wonderful April!

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These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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