Credit counseling - The after effects

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Credit Score Secrets
Any credit you have will be part of your credit report. This includes credit cards, car loans, mortgages and student loans, etc. The credit bureaus or any prospective creditor may use this information to generate a credit score. How credit scores are calculated is not a secret at all.

Credit Score Explained

A credit score statistically compares information about you to the c... Read credit counseling article



Pay Now or Later - Debit versus Credit
Which is better, debit or credit? Can't decide if you should shop with a debit or credit card? This article will discuss some of the similarities and differences between shopping with a debit card versus shopping with a credit card.

When you use a debit card, the bank subtracts money from your bank account. Debit cards allow you to spend only what is in your bank account. It is a rapid ... Read credit counseling article



Credit counseling - The after effects
You have probably seen television commercials reaching out to consumers who are struggling to pay their monthly credit card debt. They are advised to call an 800 number, and the credit counselors will contact all of their creditors, negotiate interest rates and lower their monthly payments. Sounds like a dream come true! However, they fail to mention the harsh consequences that follow.

As a branch manager of a large mortgage brokerage, I have had many credit-counseled consumers looking to refinance, or purchase a home. In the process, they were devastated to learn that their credit history was badly damaged because of credit counseling. They claimed the credit counselors never told them that this would happen. Under each negotiated item listed, their credit report reads "In Credit Counseling." Most banks and creditors will turn down a loan application if those three words appear on the credit report, regardless of good credit scores. If a loan does get approved after credit counseling, the interest rate and monthly payment will most likely be very high. The lender will view this borrower as a high risk. Therefore, the lender must charge a high interest rate to justify taking such a risk. Many lenders risk a credit-counseled consumer the same as if in bankruptcy.

Most credit counseling agencies also mention that they are a non-profit organization. But what does "non-profit organization" really mean? I was once hired by a "non-profit organization" to set up an accounting system. They actually requested that they be charged double; stating "If we don"t spend all of our profits by the end of the calendar year, we will lose our tax-exempt/non-profit status." The client also mentioned that they were taking their entire staff to Hawaii to ensure the profits will be spent by year end. With all due respect; I am not implying that "non-profit organizations" are dishonest. However, in some cases I believe the term may be misleading consumers to believe they are volunteers.

A few of my clients have negotiated lower mortgage payments on their own, with a simple phone call to the lender. Some lenders will allow this. However, months later, their mortgage history reported late payments every month since this negotiation was made. Their credit scores also took a plunge. They thought the lenders were being kind and understanding by lowering their monthly payments. They had no idea that negotiating payments would destroy their good credit history.

They have tried to dispute the late payment history with the lenders and credit bureaus; while showing proof that they did pay every month. However, they lost the disputes because a short payment is considered a late payment -- regardless of any payment agreement. This should have been disclosed, but was not. In all fairness; had they known this, they would have cancelled the payment agreement from the start. They will now have to wait about seven years for the negative credit to be removed.

A good rule of thumb: Try to keep your credit card debt under 5% of your yearly income. Keep in mind; a credit card with a $2,000.00 balance may take 20-years to pay in full if only minimum payments are made. By setting spending limits, you are greatly securing your financial future.

I encourage any homeowners with growing debt to take the proper action before the debt gets out of control. Waiting too long could make things worse and lead to fewer options available to them. A debt consolidation refinance may be the answer. It will most likely improve credit, save thousands, relieve financial pressure, and offer a fresh start.

Every person's credit situation is unique. I would like to answer questions and possibly offer advice to individuals who are concerned about making smart choices regarding their financial future. Please feel free to call or email me with questions or comments, or visit my web site.

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Non-Profit Credit Counseling

For those that have gotten themselves into trouble over credit card debt, there are organizations that can help. Many nonprofit organizations counsel people on how to get out of credit card debt.

Many of those that get into credit card debt need advice on spending patterns, organizing their finances, and understanding interest rates and their effects of loan payback. Counselors help those in need by stressing the importance of not incurring any new debt, paying off high interest rate credit cards first, consolidating debt, and understanding the scope of one's debt.

A basic first step in counseling is to understand how much debt needs to be paid off. A counselor will sit down with a client and add up the debt from various credit cards, then determine through asking specific questions how much the client can pay back each month considering the clients other financial responsibilities. They both come up with a repayment plan, and the client comes in regularly to confirm that the plan is being followed, or to adjust the plan if there are extenuating circumstances. Another type of credit counseling involves a more hands on debt management approach. A non-profit debt management firm will do all of the counseling described above, but will also attempt to negotiate a better repayment plan with the credit card company. The client often then creates a repayment plan with the debt manager instead of the credit card company. It is important before entering an agreement with this type of credit counselor to make sure they have a good history of helping others.




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Credit counseling - The after effects
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