"Cut Your Payments in Half!" the headline screams.
"Consolidate
Your Bills into One Low Monthly Payment!"
Debt Consolidation And Credit When you see ads like this, they are often from Credit
Counseling
firms. In this article, I'll explain the principles behind
the
Credit Counseling approach and discuss the main problem
consumers
face when they join one of these programs.
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Check Credit Rating First, let's get our definitions straight. The term
"Credit
Counseling" is actually quite misleading, since it has nothing
to
do with preserving or improving your credit score. In fact,
Credit Counseling will often damage your credit, an
unpleasant
reality that is sometimes downplayed by industry
representatives.
Your credit profile is very important in determining whether or not an application for credit is accepted or declined. There are two methods below that can help you and our Guide (at the top of this page) provides a further insight into credit scoring. Understand your credit rating and help improve your ability to get credit with your Equifax Credit Rating.
Improve Credit Rating Credit Counseling is a debt management program where you make
a
single monthly payment to an agency. In turn, that agency
distributes the money to your creditors on your behalf,
ideally
at lower interest rates so you can pay off the debt faster.
Credit Counseling should not be confused with Debt
Consolidation,
Debt Settlement, or Debt Termination. Each of these debt
programs
takes a very different approach from Credit Counseling.
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Credit Online Rating Report Of all the available debt options, Credit Counseling is by
far
the most popular, with millions of Americans participating.
Does
this mean it's the best choice for most people struggling
with
debt? No! There are numerous problems with this approach.
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Credit Score Rating Scale In recent years, the Credit Counseling industry has been
heavily
criticized by impartial consumer groups like the Consumer
Federation of America. But these criticisms often miss the
mark
entirely. They usually focus on the aggressive companies that
use
their non-profit status to trick consumers into thinking they
are
charitable organizations, or even that their services are free
of
charge. In reality, these outfits charge hefty "voluntary"
contributions, often adding up to hundreds of dollars, plus
steep
monthly fees as well.
This represents the average time taken by customers of the company (Trade Debtors) in settling their invoices for goods and services supplied on credit.
Bad Card Credit Credit People However, I'm not talking here about the bad companies who
provide
little or no actual "counseling," or the ones that are only
in
business to make their owners rich. No, I'm talking about
serious
problems with the actual business model itself. So let's take
a
closer look at how Credit Counseling works.
Free Credit Rating Report Let's say you owe $25,000 on several different credit
cards.
Let's also assume your average interest rate before you
enrolled
was 20% (which is actually low these days, especially if
you've
missed any payments). Your minimum monthly payments are $500,
which you've been struggling to keep up with. At this rate,
it
will take a whopping 109 months (more than 9 years) to pay
off
your debts, assuming you don't miss a single payment along
the
way.
Credit Rating Scale You enroll in a Credit Counseling program that promises to
get
you out of debt faster. But does it? Assuming your creditors
agree to participate in the program (not always the case),
the
real key is the concession they will grant on your interest
rates. In prior years, creditors looked more favorably on
Credit
Counseling and they offered steep discounts off the normal
interest rates. But lately they have squeezed the industry,
and
the concessions are not so good any more. Currently, most of
the
major players will reduce interest rates down to a range of 7%
on
the low side to 18% on the high side. We'll use 12% as the
average.
Bad Credit Rating So if you keep your payments at $500 per month at the new
12%
rate, how long will it take? First, we need to deduct the
monthly
fee charged by the agency. In this example, we'll use a fee
of
$25 per month, so $475 of your $500 will go toward debt
reduction. The good news is you'll be out of debt faster. The
bad
news is that it will still take 75 months (more than 6 years)
to
become debt-free.
Credit Rating Agency But what happens if you can't keep up with that $500 per
month?
After all, you sought help from a credit counselor because
you
were struggling financially, right? Let's say you drop down
to
$450 per month. After deducting the $25 monthly fee, that
leaves
$425 toward your debt plan. Now you're looking at 90 months
(7
years & 6 months), which is not much better than the 109
months
you started out with.
Credit Rating Canada So how can credit counselors claim to cut your payments in
half?
Good question. If you dropped down to $250 per month, you'll
never pay off your debt! At 12% interest, the debt will climb
faster than your $250 per month can reduce it. The lowest you
could go would be $300 per month. However, it would now take
20
years to pay off the debt, hardly an improvement!
Bad Credit Mortgage Rating In order to truly cut your payments in half, down to $250 in
this
example, the agency would need to completely eliminate all
interest! And even then, it would still take more than 9 years
to
pay off the balance! So the ads claiming you can cut your
payments in half are simply false.
Good Credit Rating Bear in mind here that in our example, we're assuming
you're
working with a good company that charges low fees and
actually
obtains good interest rate concessions from all of your
creditors. Even with the best of credit counselors, you're
still
looking at a 5-9 year program to pay off your debts.
Credit Score Rating Chart That's why Credit Counseling is usually only effective for
people
with short-term financial problems. Consumers with long-term
financial instability have trouble keeping up with the
regular
payment stream required to make these programs work. The
result?
Even the most favorable statistics show that about 3 out of 4
people drop out of Credit Counseling programs before
completing
them.
Credit Mortgage Rating Poor If you do decide to join one of these programs in order to
obtain
some short-term relief, be sure to do your homework first.
Here
are a few tips to help in your selection:
Good Credit Rating Score 1. Look for a company that actually provides old-fashioned
budget
advice and counseling. If they want to sign you up right away
without first understanding your budget situation, move on!
Poor Credit Rating Loan 2. Obtain copies of the contract and read it carefully
before
signing up. Make sure you understand all of the fees
involved.
Are there enrollment fees? "Voluntary" contributions? Monthly
fees? Extra fees per account? These hidden fees can add up to
big
bucks.
Bank Credit Rating 3. Make sure they work with all the creditors on your list
and
not just some of them.
Credit Card For Poor Credit 4. Don't be fooled by "non-profit" status. That doesn't
guarantee
you're dealing with a good company. And it certainly doesn't
mean
the service is free!
Business Credit Rating 5. Aim to find a local company that you can visit in
person.
Check out your target company with the local Better Business
Bureau.
Moodys Credit Rating 6. Make sure they provide support after the sale. Try
calling
their customer service number to see if you can get through
promptly.
Credit Card With Bad Credit Remember, you can eliminate your debts if you take a
disciplined
approach to your finances, make a budget and stick to it, and
don't use your credit cards unless you can pay off new
balances
in full each month.
Personal Credit Rating Good luck in your financial future!
Unsecured Loan For Bad Credit Charles J. Phelan has been helping consumers become
debt-free
without bankruptcy since 1997. A former senior executive with
one
of the nation's largest debt settlement firms, he teaches
consumers a do-it-yourself method of debt negotiation &
settlement. Expert training via audio-CD plus personal
coaching
helps debtors achieve professional results at a fraction of
the
cost. http://www.zipdebt.com/article1
Credit Rating Company Charles J. Phelan has been helping consumers become debt-free
without bankruptcy since 1997. A former senior executive with one
of the nation's largest debt settlement firms, he teaches consumers
a do-it-yourself method of debt negotiation & settlement.
Expert training via audio-CD plus personal coaching helps debtors
achieve professional results at a fraction of the cost. To learn
more, please visit http://www.zipdebt.com
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