If you’re reading this article, you’re probably concerned about your credit score. Chances are, you’re struggling to make ends meet, and there’s always way too much month left at the end of the money. You may feel scared and insecure, wondering what will happen if you get sick or lose your job. Maybe you’re late on your payments. Creditors may be calling you or threatening to send you to collections or to garnish your wages or even repossess something.
When you’re in this situation, the stress is unimaginable, and you’re ready to try anything that might help you get out of the mess you’re in. And you see the credit repair ads everywhere; on TV, in newspaper flyers and magazine blow-ins, and on the internet. They promise to fix your credit and raise your credit score rapidly-but can they?
Frequently, it’s a case of, "If it seems too good to be true, it probably is." There are honest, ethical companies that will help you with your financial problems and they really can help you raise your credit score-over time. But there are also a lot of snake oil salesmen out there, who prey on people who are vulnerable.
How do you tell the difference? How do you know if a credit repair company will help or hurt you? Looking at the types of service they offer will help you distinguish between them. Credit Counseling
Credit counseling services work with you to manage your finances and pay off your debt. They provide education and support services, help you develop a budget, teach you ways to trim expenses and may help you find ways to make extra money to help pay your bills.
They usually provide lots of free educational resources, even if you don’t use their services. When they do charge for workshops or individual counseling, the fees are usually modest. They use counselors who are trained in budgeting and money management, not salespeople who are trained to get you to buy their services.
In October, 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, which provides tighter controls on filing bankruptcy. One of the provisions of the Act is that you must attend a credit counseling briefing at least six months before filing, and the counseling must use an approved curriculum. The Federal Government maintains a list of credit counseling services that are approved to provide a briefing, and that list is a pretty good place to find a reputable credit counseling service. Debt Management Programs
Before things get bad enough that you’re looking at bankruptcy, a credit counselor may suggest helping you establish a debt management plan. This is usually a last resort effort to avoid bankruptcy, and your creditors may participate in the hope that they will recover at least some of the money you owe them.
The way a debt management program usually works is the credit counseling agency contacts your creditors and asks them to participate in the program. The creditors don’t have to participate, and you have to keep on making your minimum monthly payments to those who don’t. You work out how much you can pay toward your debts each month with the credit counselor, and you pay that amount to the credit counseling agency. They use it to pay their own fee and to make payments to your creditors.
Creditors will often waive or lower your interest rate and may even write off part of your debt if you agree to a debt management plan and make your payments every month. They usually require that you don’t add any debt while you’re in the program. By sticking to the plan, however, you can pay off your debt, get yourself out of financial trouble and improve your credit score. Debt Negotiation Plans
Debt Negotiation Plans, sometimes called Debt Settlement Plans, are rarely on the up and up. Snake oil is too generous a description for some of them; some are just plain venom because they can put you in financial and legal jeopardy. Anybody who wants to talk you into a debt negotiation plan is scamming you, especially if they have not already worked through an extensive process of education, counseling and debt management with you.
Under the best circumstances, all these programs do is call your creditors, tell them you are trying to avoid bankruptcy, and ask them to write off part of your debt. And creditors rarely comply; they’d rather work with an established and approved credit counseling agency.
Under the worst circumstances, these guys take you for a ride. They’ll you to stop making payments while they negotiate with your creditors, and to just ignore late payment notices and non-payment notices and collection notices. After several months of non-payment, they’ll contact your creditors and try to get them to define your debt as non-collectible, which will get reported to the credit reporting agencies. At that point, they’ll try to negotiate partial payment of the debt, which the creditor may accept. What they don’t tell you is that the amount that you don’t pay is considered as taxable income and is reported to the IRS as such.
Then they dispute every negative entry on your credit report. The credit reporting agencies usually remove the negative entries while they investigate the disputes, and that’s when these flimflam operators obtain a copy to send to you. So, it looks like they reduced your debt and cleaned up your credit. When they credit reporting agencies complete their investigations, however, the disputed negative information goes right back on your credit report. The credit repair company got your money, and you’re left with a worse credit score than before. Credit Consumer Rights
One of the ways to make sure you are getting credit services that will actually help improve your credit score is to know your rights. Congress recently passed another law, the Credit Repair Organizations Act, to help protect consumers against credit repair fraud. According to the Credit Repair Organizations Act, these services must:
- Collect any money from you until their services are completed.
- Give you a copy of your Consumer Credit File Rights before you sign the contract.
- Let you know that you can cancel the contract within three days if you change your mind.
- Give you a contract before providing any services that tells you what they will do, how much you will be charged and how long it will take them to provide the service.
When you know your rights, it’s much harder for unethical credit repair companies to scam you. You can get the help you need without fear that you’re going to wind up worse off than before.
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