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Which of the 4 types of debt-help companies is right for you?

Deep in debt but not ready for bankruptcy? Consider these types of companies

By

Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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'Opening Credits' stories

Question for the CreditCards.com expert

Dear Opening Credits,
What's the difference between all those credit companies? Some say they can repair bad credit and others say they consolidate. What is a consolidation company? Do they pay off your bills for you? And then what? What about those companies that get you a better deal on your debt -- are they for real? I owe about $14,000 and need help. Thank you. -- George.

Answer for the CreditCards.com expert

Dear George,
There are indeed many different types of organizations that specialize in consumer credit and debt assistance. Some are legitimate and beneficial, while others are -- well -- not so much. So how do you determine which is which? Here is a rundown of each that you mentioned, as well as how they may be able to help you with that $14,000 balance.

Credit counseling
Nonprofit credit counseling agencies can be terrific places for troubled borrowers. They provide services at little to no cost, including free financial counseling and community workshops. All offer debt management plans (called DMPs). With these arrangements, you would pay the agency and they, in turn, pay your creditors. The benefits include: lower interest rates, a single monthly payment and the agency's guidance and advocacy.

Is a DMP right for you? If you want to repay your entire debt, it could be. You've got to have the income to support their minimum payment, though. That minimum payment is based on the total amount you owe and is geared to get you to be debt-free in three to five years. Oh, and agencies do vary in quality. Visit the major accrediting agencies for credit counselors -- the National Foundation for Credit Counseling  or the Association of Independent Consumer Credit Counseling Agencies -- to find a good one and request a seasoned counselor.

Debt settlement
If you want a break on your burden, a debt settlement company may sound attractive. These businesses advertise that they can cut your liabilities down to a fraction of what you owe. Just how they get the job done varies, but the most common method is to have you stop paying your bills and instead open an escrow/savings account with them. After the accounts go delinquent and you've accumulated enough money, they propose a settlement.

I'm not a fan of debt settlement companies for a few reasons:

  • They can be dangerous, since some creditors sue for the balance once they get wind of your intentions.
  • They charge for their services, money best sent to your creditors.
  • It's usually best to cover your debts in full. It looks better on your credit report, and you know you are doing the right thing when you do so.

Credit repair
Bad credit? Need to remove items that are preventing you from getting the loan you want? Call a credit repair company today!

Or, rather, don't.  I actually haven't heard their commercials in a while but they used to promise all sorts of miracles. Some claimed they could remove accurate negative information from reports, others guaranteed a higher score in a month or two. The fact is that no outside company can do a single thing for a fee that you can't do for yourself for free. The Fair Credit Reporting Act ensures a consumer's ability to dispute old and inaccurate information from a credit report.

Consolidation loans
Many people confuse DMPs with debt consolidation loans, but they're really very different. Credit counseling agencies don't lend money, they just bundle payments. Some banks and credit unions, on the other hand, offer consolidation loans (or just personal loans) to their customers.  With them, you would transfer your unsecured debt to a new loan. The idea is to secure a better interest rate while having the convenience of a single monthly payment.

I'm neutral on this strategy. If the interest rate is lower than what you're getting now, you could come out ahead. Switching from a revolving account to an installment can be advantageous, too, since you would have a fixed number of years to repay. The problem is that they sometimes lead to worse troubles. Because the original credit accounts remain active, the lines of credit are open. Without curing underlying issues, you're free to run up the credit accounts again and still have to deal with the consolidation loan.

It should be obvious by now that reputable assistance exists. But before contacting anyone, know exactly what led you to owing so much money. After that, approach the appropriate organization and make a personal commitment to get out -- and stay out -- of debt.

See related: Tips for picking a credit counselor, 8 myths about debt settlement, The good guys of credit repair, 9 things you must know about debt consolidation

Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.

Send your question to Erica.

Published: April 21, 2010


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