If you’ve got mounting credit card bills, you may also have countless credit repair or debt relief offers taking over your mailbox. Those promises of reduced debt, low-interest loans and magical fixes to your credit score can be tempting, but you need to be very careful to make sure nobody is taking advantage of you.
The Difference Between Credit Counseling, Debt Relief, Debt Consolidation and Credit Repair
Credit counseling is the most comprehensive solution, focusing on a variety of resources to help you solve your money problems. It also requires the most work from you and doesn’t promise immediate relief. Tools include budgeting, educational programs, access to counselors and a personalized plan. Credit counseling may, but does not always, lead to a Debt Management Plan (DMP). A DMP is where you pay money into an account and the agency pays your debts from that account.
You can find a list of government approved credit counseling agencies in the United States here: https://www.justice.gov/ust/list-credit-counseling-agencies-approved-pursuant-11-usc-111
Debt relief or settlement companies say they can renegotiate your debt, so you don’t owe as much by reaching out to your creditors and getting them to lower your balance, interest rates or fees. You can also try to do this yourself to avoid the fees that a company like this will charge you.
Debt consolidation companies offer you loans to pay off your debts in one fell swoop. You may get drawn in by promises of low-interest, but once you go through the application process find that you are subject to higher fees. You may also be able to consolidate and pay off your debt through a second mortgage or home equity line of credit. However, keep in mind that if you can’t make your payments, you could lose your house.
Credit repair companies promise to clean up your credit report for a fee, but the chances that they can do anything you couldn’t do on your own are slim. You have the right to correct inaccurate information in your file, but nobody can remove accurate negative information. Only time and consistent payments will repair your credit.
Consider the following red flags to help you avoid companies with questionable practices:
- Fees are charged before your debts are settled
- You are pressured to pay fees masquerading as “contributions”
- The company tries to look like a government program
- There are guarantees to make debt go away or improve your credit score
- You are told to stop paying your debts and communicating with your creditors
- You can’t get additional information without providing personal financial information
- The company makes promises about what they can do for you without reviewing your financial situation
- The company offers a Debt Management Plan without teaching you budgeting and money management
- There are promises that the company can erase your bad credit or remove information from your credit reports
Before you sign up for any program, be sure to do your homework. Check for a business review on the company at bbb.org. Do an internet search for the company’s name along with “reviews” or “complaints” to see what people are saying about them. You can also check with your state’s Attorney General before choosing a company.
In the U.S., you have rights and you are protected by the Credit Repair Organization Act (CROA), enforced by the FTC. Legitimate companies adhering to the Act must provide:
- A written contract detailing your rights and the services to be performed
- A three-day cancellation period with no charges
- Details on how long it will take for you to get results
- An accounting of all costs and fees
- Any guarantees that they are making through their marketing
If you feel like you’ve been taken advantage of or scammed by one of these companies, you can report them to the Alabama Attorney General’s Office at (800) 392-5658. You can also file a complaint with the FTC online or call 1-877-FTC-HELP.