More and more consumers are turning to credit counseling and credit repair agencies for help getting out from under a mountain of accumulated credit card debt. While some are legitimate, says Early Show money maven Ray Martin, others are only out to fleece you. How can you tell one from another? Martin offers advice in this column.
With a perfect storm of falling housing values, rising loan defaults and a slowing economy, more folks are struggling to manage their debts, and more will turn to companies that sell credit repair and credit counseling services.
Many of these companies aren't regulated by federal law, so anyone can open a credit counseling business. As a result, the services provided can vary widely from one company to the next.
The trick is to not get confused by the similar names and similar claims.
If you are struggling with debt, a legitimate credit counseling company can help. But a bad one can do more damage.
Here's a guide to help you know what to look for.
A Few Bad Apples
Many credit counseling companies are set up as non-profit corporations. This can create an appearance that these companies exist solely to look out for you -- that they exist to provide a public service. This nonprofit status enables them to gain a marketing edge by creating an image that implies, "We're the good guys. We're a non-profit credit counseling company!"
Unfortunately, in some cases, the services provided come with a hidden agenda and lots of hidden fees. The most famous example was Ameridebt, which agreed to shut down its debt management operation in a settlement with the Federal Trade Commission, which had charged that Ameridebt deceived consumers into paying at least $170 million in hidden fees when it claimed to be a nonprofit that would teach people to manage their finances for no upfront fee.
Credit Repair Shops
These outfits claim that, for a fee, they'll clean up your credit report so you can get another loan, get a better mortgage, better insurance rates, or even a job. Essentially, they offer to manipulate or even manufacture credit report information about you that creates the appearance that you have been a responsible consumer of credit. Often the promise includes removing all late payments and other derogatory information from your credit report.
Of course, to perform this service -- who wouldn't want to start over with a "clean slate" when it comes to your credit reports -- you simply have to pay a few thousand dollars and agree to a few credit schemes.
Tip Off to the Rip Off
One of the credit repair schemes is to "create a new you" by applying for and obtaining an Employer Identification Number for you to use instead of your Social Security Number on new credit applications. Another trick is to use "piggybacking," which is where you are added as an authorized user on another individual's credit account, which of course has a good history of timely payments, the objective being that the other person's account with the good history appears on your credit report, which increases your credit score.
What you should know is this: Aside from being dishonest, these scams are illegal. It is a federal crime to lie on a loan application or obtain and use an Employee ID number under false pretenses. And the claims to remove negative information from your credit report? No one can legally remove accurate and timely negative information from your credit report.
Credit Counseling Services
Not to be associated with credit repair shops, consumer credit counseling firms offer several different and legitimate services. First, education and debt-management counseling by trained professionals who can meet with you in person, over the phone, or online to help you review your debts, set a budget, and help you develop a plan to pay down that They can also help you learn new money money-management skills to keep you from getting overwhelmed with debt again.
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