1. Credit counseling is an industry that has popped up because of a lack of one very simple thing, education. Its the thing that is not taught in our schools which is causing all of this financial crisis the country is jammed up in. All that a credit counselor really does is say to you to pay your bills on time. The best part is that you are going to pay them a fee to tell you to do that. Doesn’t that sound a bit backwards. You are getting bills from creditors telling you to pay your bills by a specific date, you can’t figure it out without hiring somebody to tell you how to do it.
2. Some of the other features credit counselors do is tell you what balances you need to be working on to get them paid down faster. You will usually be told to do something like pay down the balances with the highest interest rates first and then work on the other debts. Again, you should know this.
3. Credit counselors will work with you and your creditors to maybe get some kind of payment plan going because of your financial problems. Sometimes this helps and sometimes this does not. More than likely you would be better off not paying the credit counselor their fee and taking that money and paying your bill off.
4. Once you make an agreement with a credit counselor they inform you to stop paying your bills. That sounds weird huh. Stop paying my bills? Yup. What happens is you pay the credit counselor and they pay your bills for you. Sometimes they even set it up with your employer to have a percentage of your wages taken out of your paycheck before you even touch the money. This all sounds so good but what about your bills and your credit report?
5. Depending on what credit counselor you work with some pay all of your debts in full and you pay them a smaller percentage than what you were paying your credit cards, home equity line of credit, car payments, personal loans, etc. This on paper seems like a better deal. You can consolidate all of your payments into one monthly payment and probably lower your effective interest rate to a lower one. An effective interest rate is one where you count up all of the interest rates you have and take their average to determine what you are truly paying. The credit counselor will negotiate with you to have a interest rate probably half of what you are paying and put it on a 3, 5, or 10 year loan with them.
6. Other credit counselors will pay your debts for you with the one payment you send them. They pretty much become your secretary and handle everything for you. Still sounds like a burden taken off of your shoulders?
7. Wrong. Once you make an agreement with them to stop making payments it takes about a month or two for them to make payments for you and during this time period you are starting to get lates on your credit report. So everything you told them to pay for you is now getting behind. This is when the late fees kick in and all of those credit card guidelines that say if you are late on just one payment they can raise your interest rate from the fixed 9.99% to 17% kick in the next month. So now you are paying more in interest, getting late fees, and your credit report is getting jacked up.
8. Even if you go the route where the company pays all of your debts off the real player in this scenario comes to life. The second you sign up with a credit counselor it gets put on your credit report. The credit bureaus recognize this and immediately your credit score will drop. In some cases people with poor credit history there score will drop 50 to 100 points. Talk about never being able to get approved on anything for awhile.
9. Don’t even think about trying to refinance your 30 year fixed rate mortgage within the next two years. Mortgage companies will see this on your credit report and it will automatically deny you. In most cases you will have to be two years out of credit counseling before any mortgage company will even look at doing any kind of mortgage with you. In the mortgage companies eyes, credit counseling is the same thing as filing bankruptcy. It proves you can’t manage your own finances and you are not capable of paying back the mortgage.
10. Think twice about going with a credit counselor. You should be smart enough to know that all you need to do is make your payments on time. If you cannot afford whatever it is your buying in the future, then do not buy it. Credit counselors charge a fee to work with them. Save that money and pay down your bills. Prepare to have your credit report destroyed and to wait at least two years before trying to refinance your home or buy a new one if you go with a credit counselor. If you do own a home and you can’t keep up with your payments, then maybe foreclosure is your only way out.