4 Dangers of Credit Counseling

When credit counseling is done right, it can stop ongoing damage to your credit rating, reduce the interest rate you are paying on debt and get you and your lenders working together so that they are paid back and you have a debt load you can live with. But not all credit counseling is equally helpful, and the following information will help you be aware of the dangers.

Danger No. 1 - Misunderstanding Non-Profit

The number of credit counseling services have grown as personal debt grows in the United States. Originally, credit counseling began mostly in the non-profit sector as charitable or service organizations sought ways to help those who had borrowed more than they could afford.

However, many of the non-profit credit counseling services are now big business. While the service is set up as a legitimate non-profit, those involved in it make salaries competitive with any for-profit business executive. You might think that by dealing with a "non-profit" you are going to pay less or get better service. But this is not necessarily the case. Be sure to understand the mission, the fees and the reputation of any non-profit credit counseling service you deal with.

Danger No. 2 - Non-Payment

If you begin a payback plan with a credit counseling service and do not keep up, your finances can be in a worst situation than when you started. It's important to understand what a legitimate credit counseling service does. A credit counseling service approaches lenders on your behalf and recommends a plan - often with a reduced interest rate and lower payments - for you to get current on past due payments.

Once the plan is accepted, you pay the credit counseling service, they pay the lender and the lender remits a small portion of your payment as compensation to them. Lenders often will make a note in your credit history that you have begun a workout plan through a credit counseling service. But if you do not keep up with the new payments, the same loan that was hurting your credit score hurts it a second time. Plus the lender's willingness to work through your difficulties will be less going forward.

Danger No. 3 - High Fees

Some credit counseling services charge high upfront fees for them to consider you as a client, these are the companies you should be wary of. As stated above, the credit counseling service is paid by the lender from your payments. High upfront fees means you are paying twice and you have removed the counseling service's risk. You should be charged about $10 for the service to set up an account for you.

Danger No. 4 - Non-Performance

Just as it is a danger to you if you don't pay your renegotiated payments, it is also a danger that your credit counseling service doesn't perform. Typically, the credit counseling service collects monthly payments from you and then pays lenders on your behalf. But if a credit counseling service doesn't perform and doesn't forward your payments, your credit rating is once again negatively impacted.

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