AVP/SR. Mortgage Loan Originator
Alaska USA Mortgage Company
Phone: 360-679-5633 / 360-969-5550
License: NMLS#304060 / CL-157293
Debt Relief Options
Credit Counseling and How It Affects Your Credit
By Linda Ferrari
I have always been a strong proponent of credit card use for achieving and maintaining strong credit scores. However, it is mission-critical that you always live within and preferably below your means. But, the lure of consumerism with ease has caused so many Americans to exceedingly spend more than they make, causing them to fall victim to long-term indebtedness.
The statistics on consumer debt paint a grim picture. Per The Federal Reserve as of August, 2008, Americans held $968 billion dollars in consumer credit card debt. This number does not include loans secured by real estate, such as a mortgage. Another alarming statistic is that in the first quarter of 2008, consumer borrowing was at $34 billion, the most since the first three months of 2001, when the economy entered its last official recession. (Source: www.federalreserve.gov)
These numbers indicate that consumers need a clear understanding of consumer debt and relief options. Obviously, most people charge their lives away with the very best of intentions. Most people want to do the right thing. They want to provide themselves and their families the things they need, and even a few of the things they really want. And when you work hard, and you have every reason to think that your paycheck will come though over time and allow you to pay for those things, you go ahead and charge them. Very few of us look into the future and foresee a job layoff, a debilitating illness or accident, or some other economic circumstance that will deprive us of our ability to keep up with our bills. But these circumstances do happen and it is critically important that you know how to handle your debts should an unfortunate circumstance strike your world.
Understanding The Pitfalls of Consumer Debt
The first order of business for you is to understand the obligations and pitfalls of indebtedness:
So, there are a few traps out there. What are your options if you fall into a trap that finds you stuck in a consumer debt nightmare with no easy way out?
There are several types of debt relief programs offered by professional companies. It can be very confusing to readily understand the differences between the various options because they all seem quite similar to the casual observer. Your options are:
In my book, The Big Score – Getting It & Keeping It, I discuss these options in great detail, however, for the purpose of this article, I will be talking about the first, which is credit counseling, including how it works and how it will affect your credit.
Credit counseling is a service provided by organizations to help consumers find ways to repay their debts through careful budgeting and management of money. Credit counseling is an industry that is under severe scrutiny and should be entered into with caution. In my book, I list several resources that will help you do your research in finding a reputable and trustworthy agency to help.
Only unsecured lines of credit are eligible for credit counseling plans. This includes credit cards, personal loans, medical bills, collection accounts, unpaid utilities, auto loans that have gone to repossession, and payday loans.
How Does Credit Counseling Work?
How Does Credit Counseling Affect Your Credit?
Credit counseling agencies are not creditors and they do not report to the credit bureaus. So it is a myth that by contacting a credit counseling agency, your scores will go down.
So it all depends mainly on your credit at the time you enter into credit counseling. If you're already past due on your bills, you have already incurred a severe penalty to your credit scores One 30-day late can cost 50-80 points from your credit score. If you have several accounts reporting late you can lose over 200 points. However, once you start making payments under the newly negotiated payment schedule, they will become current, and your scores will start to improve over time, as the late-pays age out. Now, if you are current, and have not incurred any late pays, then credit counseling and debt management plans will not affect your credit scores, provided that you remain current.
One item to note is that once you enter into a negotiated payment schedule, all of your accounts will be closed. As discussed in chapter 7 of my book, open credit card accounts make up for almost 30% of your credit score, so unless you have open accounts that are not under credit counseling, you will lose points for not having any open accounts. The good news is that you can open a secured credit card account almost immediately to start rebuilding.
WORD OF CAUTION:Be aware that if you enter into a debt management program with a credit counseling service, and you hire them to pay your creditors in a workout plan, if they pay that creditor late the creditors will report a late pay and your scores can drop instantly by as much as 80 points. There is nothing you can do about it short of suing the credit counseling company. This is why I want you to be certain that you conduct a thorough background search, work with the most reputable firm you can find, and be very deliberate and cautious before you turn your financial well-being over to anyone.
When it comes to how credit counseling and DMPs are reflected in your credit reports, you can expect that debt management plans will show up as "Account handled by CCCS" or "Account on DMP," as a note or comment added by the creditor. This note intends to discourage lenders from enabling the individual to add additional lines of unsecured credit. However, it should not affect a borrower's ability to obtain a secured loan, such as a mortgage or car loan, and this note will not affect your credit scores. Once the plan is completed, the note will be removed. If you enter into such a plan, make sure that you request copies of your reports once you have paid balances in full in order to make sure the note has been removed.
Pros of Credit Counseling
Cons Of Credit Counseling
Credit counseling can be a great option for those who suffer financial setbacks, and I support this option if you can find an ethical company to work with and you start early enough. If you do so, you can save your credit. Here are some great resources to do your research:
Mainly, however, my thoughts regarding credit counseling are that it is a good option for someone who is facing a temporary financial set back, someone who has strong self-discipline and patience. Long-term financial stress can lead to many problems and should be handled through another debt relief option, such as debt negotiation, consolidation, or at worst case scenario bankruptcy. Again, it is extremely important to understand all of your options before making a decision.
If there is one action I want you to implement after reading this article, it is to keep your credit card debts in check, and at all times! Don't let your credit card debt get out of your control. Don't be so quick to swipe that card. Yes, I advocate that you use your credit cards, because I am a credit score expert, and the rules set forth by Fair Isaac & Co. are very clear. Consumers must have credit cards to maximize their credit scores. However, it is important that you always live within, if not below, your means.
The moment you sense a problem with your credit card debt, consider your options. If you feel that you would benefit from professional help, seek assistance from a reputable credit-counseling agency as early as possible. This is the best way to avoid long-lasting problems.
There are many opportunities to correct your problems before you reach the dead end of bankruptcy. If you need help, I strongly advise you to act quickly, decisively, and intelligently so as to avoid more painful avenues that avoidance will force.
Linda Ferrari, author of The Big Score: Getting It & Keeping It, is a leading expert in the credit education and scoring industry. As Founder and President of Credit Resource Corporation, Linda has dug into more than 14,000 credit reports providing in-depth solutions through coaching and consultation to thousands of consumers and mortgage professionals. To learn more about Linda, visit www.LindaFerrari.com.
License AK# 157293 Washington Consumer Loan Company license# CL-157293 California Residential Mortgage Lending Act, License# 4131067
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