Best Credit Repair and How Credit Counseling Works For Most Debtors
“Cut Your Payments in Half! ” the headline screams. “Consolidate Your Bills into One Low Monthly Payment!” is seen all over the internet. But how do you really know what makes the best credit repair service?
When you see ads like this, they are often from Credit Counseling companies.
In this article, I’ll explain the principles behind the Credit Counseling approach and discuss the main problem consumers you can avoid when choosing one of these programs.
Let ‘s get our definitions straight. The expression “Credit Counseling” is quite misleading since it is more to do with helping people who are in financial difficulties.
They will always start by obtaining a copy of your credit report and identifying your current score.
The credit score explanation relates to improving your credit score in order to obtain home loans and increase your chances of borrowing money.
Credit scores are calculated automatically for each individual based on your banking transactions and borrowing levels.
For example, two of the popular credit score websites are Experian and Equifax.
Best Credit Repair Program
The best credit repair program is a debt management program where you make one monthly payment to an agency.
Subsequently, that agency distributes the money to your creditors on your behalf, ideally at reduced interest rates so that you can repay the debt faster.
Credit Counseling should not be confused with Debt Consolidation, Debt Settlement, or Debt Termination.
Each of these debt programs requires a very different approach from credit repair counseling.
How Effective Is It?
Of all of 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.
In recent years, the Credit Counseling industry has been heavily criticized by impartial consumer groups such as the Consumer Federation of America.
However, these criticisms often miss the mark entirely.
They generally concentrate on the aggressive companies which use their non-profit status to deceive consumers into believing 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.
But, I’m not talking here about the bad companies who provide little or no actual “counseling,” or those that are only in business to make their owners rich.
No, I’m talking about serious issues with the actual business model.
So let’s take a close look at how Credit Counseling works.
Let’s say you owe $25,000 on several different credit cards.
It’s assumed that your average interest rate before you enrolled was 20% (which is low nowadays, especially in the event you’ve missed any payments).
Your minimum monthly payments are $500, which you’ve been struggling to keep up with.
At this rate, it is going to take a whopping 109 months (more than nine years) to repay your debts, assuming you don’t miss a single payment along the way.
You enrol in a Credit Counseling program that promises to get you out of debt faster.
But does it?
Assuming your creditors agree to take part in the program (not always the case), the actual key is the concession they will grant on your interest rates.
Recently, creditors looked more favourably on credit repair counseling, and they offered steep discounts off the normal interest rates.
But lately they have squeezed the industry, and the concessions aren’t as good any more.
Currently, most of the main players will decrease 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.
So if you keep your payments at $500 per month in 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.
Yes, the good news is you’ll be out of debt faster.
On the other hand, it will still take 75 months (more than six years) to become debt-free.
Want to Cut Payments in Half?
So how can credit repair counsellors claim to lower your payments in half?
If you dropped down to $250 per month, you’d never pay off your debt…
At 12% interest, the debt will climb faster than your $250 per month may reduce it.
The lowest you could go would be $300 per month. However, it would take 20 years to pay back the debt, barely an improvement!
To genuinely cut your payments in half, down to $250 in this example, the agency would need to eliminate all interest fully.
And even then, it would still take more than nine years to pay off the balance.
So the ads claiming you can cut your payments in half can be exaggerated.
However, the best credit repair programs will aim to get creditors to freeze future interest (not a guarantee though).
Keep in mind here that in our example we’re assuming you’re working with a good firm that charges low fees and obtains the good rate of interest concessions from all of your creditors.
Even with the best of credit counsellors, you’re still looking at repaying any debts long-term.
Even if you go to a credit repair agency it is generally only effective for individuals with short-term financial issues.
Consumers with long-term financial instability have trouble keeping up with the regular payment stream required to make these programs work.
Even the most favorable statistics show that approximately 3 out of 4 people drop from Credit Counseling programs before finishing them.
Tips On Choosing the Right Company
Should you decide to join one of these programs to be able to acquire some short-term relief, make certain to do your homework first.
Here are a few tips to help in your choice:
1. Start looking for a company which provides old-fashioned budget advice and counseling. If they would like to sign you up right away without first understanding your budget situation, move on!
2. Obtain copies of the contract and read it carefully before registering. Ensure 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.
3. Make sure that they work with all of the creditors on your list instead of only a number of them.
4. Don’t be fooled by “non-profit” status. This doesn’t promise you’re dealing with a good company. And it certainly doesn’t mean that the service is free!
5. Aim to find a local business that you could visit in person. Check out your target company with the local Better Business Bureau.
6. Make sure that they provide support after the sale. Try calling their customer service number to see if you’re able to get through promptly.
Remember, the best credit repair companies will provide you with a free consultation and some general credit counseling pointers to get you moving in the right direction.
However, keep in mind that in order to sign up and improve your situation there may be fees later on.
In conclusion, you can eliminate your debts if you take a disciplined approach to your finances.
Create a financial goal for the future and don’t use your credit cards unless you can pay off new balances in full monthly.