Rising interest rates and rising prices have many consumers concerned about their finances. So the promises of debt reduction, low-interest loans, and fixes to your credit score that arrive in the mailbox or email box are tempting. BBB reminds consumers to be aware of the difference and know what is the best way to get out of debt.
What is the difference between credit counseling, debt relief, debt consolidation and credit repair?
Credit counseling is the most comprehensive solution, focusing on a variety of resources to help solve financial problems. It also requires the most work and does not promise immediate relief. Tools include budgeting, educational programs, access to counselors and a personalized plan. Credit counseling can (but not always) lead to a Debt Management Plan (DMP) where funds are deposited into an account and the agency pays debts from that account.
The US Department of Justice has a list of agencies for people seeking debt reduction assistance and Canadian non-profit credit counseling agencies are also available.
Debt relief or settlement companies provide assistance by renegotiating the debt so that the person does not owe as much. These companies reach out to creditors and work with them to reduce the balance, interest rates or fees. Consumers can also do this to avoid fees charged by a company like this.
Debt consolidation companies offer loans to pay off debts all at once. People will often be lured by promises of a low interest loan, but once they complete the application process, they will find that the fees are higher. Depending on the situation, some people may also be able to consolidate and pay off debt with a second mortgage or home equity line of credit, but be very careful as this requires the home to be used as collateral. .
Credit repair companies promise to clean up credit reports for a fee, but the chances that they can do anything account owners couldn’t on their own are slim. You have the right to correct inaccurate information in your file, but no one can delete accurate negative information. Only time and conscientious payments will truly repair the credit report.
When worrying about their debts, people are often vulnerable to promises of quick fixes. Here are some red flags to avoid companies with questionable practices.
Fees are charged before your debts are settled
Added pressure to pay fees disguised as “contributions”
The company is trying to look like a government program
“Guarantees” to make debts disappear or quickly improve a credit score
You are told to stop paying your debts and communicate with your creditors
You cannot obtain additional information without providing personal financial information
Promises about what they can do without actually reviewing the financial situation
Company offers debt management plan without teaching budgeting and money management
Promises that the company can erase bad credit or remove information from your credit reports
Before enrolling in a program, research the company that offers the financial service. Find a review of the company and read complaints about the company at BBB.org. Contact the State Attorney General, the Financial Consumer Agency of Canada and the Federal Trade Commission for more information.
Consumers are protected by the Credit Repair Organization Act (CROA), enforced by the FTC. Legitimate companies adhering to the law must provide:
A written contract detailing your rights and the services to be performed
A free three-day withdrawal period
Details on how long it will take you to see results
Accounting for all costs and fees
All the guarantees they make through their marketing
If you believe you have been taken advantage of by one of these companies, report them to BBB ScamTracker, your local Consumer Affairs Bureau, or the State Attorney General. You can also file a complaint with the FTC or call 1-877-FTC-HELP. The FTC may not be able to resolve individual issues, however, if there is a pattern of complaints or possible violations, it may take action. For a list of approved credit counseling agencies: https://www.justice.gov/ust/list-credit-counseling-agencies-approved-pursuant-11-usc-111
BBB is a business-supported non-profit organization that sets and maintains high standards for fair and honest business behavior. BBB Serving Central East Texas was founded in 1985 and serves 19 counties.