Negative effects of credit counseling?

iVillage Member
Registered: 07-03-2005
Negative effects of credit counseling?
10
Mon, 03-06-2006 - 7:49pm

Hi, all.

iVillage Member
Registered: 03-17-2003
Mon, 03-06-2006 - 9:59pm

Hi wizzybiscuit. Sorry no one has answered your question so I'll give a try.

First there is a thread in the "Compulsive Spending" folder that had a typical selection of responses posted. Here is the link: http://messageboards.ivillage.com/n/mb/message.asp?webtag=iv-mlsupport&msg=13880.4&ctx=65536

Let's start with some Credit Industry 101 basics.

The service you are preparing to sign with does not provide assistance with your credit report. They will only assist you with your creditors and paying off your debt within a reasonable amount of time. Your concern is a good one. Your credit report is something credit issuers pull and look at long after you have successfully completed your debt repayment program. So just prepare yourself to see your credit reports look "horrible" and your credit scores take a hit. It's not the end of the world. It's just the first step in getting through this phase as you get out from under your debt.

If you want to see what happens after you have begun credit counseling, first pull your three credit reports and the three credit scores before you enter into the program. After you have been with the credit counseling organization for 3-6 months, then pull those same reports and credit scores again. Note the derogatory entries and change in your scores. That is what happens when you sign with these programs. I'm not saying it's bad or warning you against them. It's just how the credit industry works. Don't blame Experian, TransUnion or Equifax -- all they do is assimilate your public information and account history. It's the credit industry that reports your account activity to the credit reporting agencies. Once your creditors report your account status and payment information, you will see exactly what you look like on paper. The information may have errors that are somewhat easy to correct, but there will be derog entries and the derog entries will continue until you are done with the credit counseling service and thereafter for the next 7 years, after which the old info "falls off" the records. The good news is the older the derog history the better your credit life gets, especially if you are building a new history of ontime payments (probably the single most valuable action we can take).

No cause for alarm really. Your credit scores are fluid and constantly fluctuate. You will be getting out from under your debt in 2 years and putting the brakes on outrageous interest payments. Sometimes it's not the principal that is the problem but the huge sums of money extorted/paid in interest charges.

What happens to your credit during counseling largely depends on how your lenders report your account to the credit bureaus. It varies from creditor to creditor. Some credit cards report its customers as delinquent on their bills until they make three consecutive payments of the new minimums negotiated by their credit services. Another credit card may simply add a note to the credit bureaus’ files that the customer is enrolled in credit counseling and then your FICO score will take a nose dive. The good news is some credit issuers/lenders aren't bothered by an entry of credit counseling and some credit issuers/lenders are.

Unfortunately there are no absolutes in this area. Some people are pleased with the way their household debt was handled and some people have nightmarish experiences. Each person's debt problems are unique. What works for you is all that matters.

What to expect with credit issuers afterward? There are still some lenders who refuse to deal with anyone who has enrolled in credit counseling. Let's say you have fallen behind on your payments before you entered credit counseling, you’ll find those late payments will still affect your credit score even after you’ve paid off your debts. So perhaps a lender won't have any qualms with the entry of your credit counseling program, but the late payments are big problems. Did you do the right thing? My answer is: there are no easy answers.

The L. A. Times ran a well written, factual article on credit recovery and CCS. "People who try to pay off their debts instead of filing for bankruptcy often find it takes much longer to restore their credit. Lenders are wary of them because of the huge amounts they still owe (and because they still have the option of filing bankruptcy, whereas those who have already filed are generally prohibited from filing another case for several years). Participating in a credit counseling debt-repayment plan can make lenders leery as well."

One thing is for certain: the credit industry will embrace you. They are eager to issue credit cards, see you get into your dream home at a dream interest rate (their dream interest rate or your dream interest rate) and hand you the keys to your Soccer-Mom SUV. It's the generosity of the credit industry that got you credit before, penalized you with higher interest rates when you had credit woes, reported your accounts with derog information to the credit reporting agencies and will continue to fill your mailbox with more offers for credit.

Good luck.

cg108

iVillage Member
Registered: 01-25-2006
Mon, 03-06-2006 - 11:13pm

Liz,
You don't mention if you already have derogatory information on your credit report. If you do not already show late payments or delinquency/repossesion/collections sorts of things on your report, you might want to hold off on credit counseling and see if you can't do some things to help yourself instead. I have not personally done credit counseling but it definitely can have a negative effect on your credit rating and a lender's willingness to lend you money. There seems to be a fair amount of debate online as to which is worse, bankruptcy or CCS but since there is a debate, it's safe to assume both are pretty bad.

If you don't have derogatory info on there and want some suggestions on what you might be able to do w/o CCS, post some more details about your situation (balances, interest rates, etc) and everyone always chimes in with lots of great ideas.

You also don't mention if your fiance is aware of what's going on but I personally wouldn't move forward without discussing it with him because your credit will effect his ability to get mortgages, etc. in the future after you are married.

Peg

Avatar for cl_phocid
iVillage Member
Registered: 03-26-2003
Tue, 03-07-2006 - 7:21am

Hi LIz - thanks so much for posting here on the DSG.

All my best,
Danni

iVillage Member
Registered: 07-03-2005
Tue, 03-07-2006 - 10:08am

Wow, lots of questions. lol

Avatar for 2locachicas
iVillage Member
Registered: 05-14-2003
Tue, 03-07-2006 - 10:19am

Liz-

Can your fiance afford to buy the house one his own? Could he maybe buy the house befor eyou get married on his credit alone so he can get the best rate possible?

I went through bk right before I got married through NO fault of my own. I was 19 and I had an ex boyfriend that had somehow talked places into opening credit in my name without me being present and took checks with him signing my name and he was OBVIOUSLY not a woman. In retrospect I should have called the police but I was so beaten down from an abusive relationship I needed it to be over and get rid of him.

We didn't buy a house until 5 years later just because that's when we were settled enough to want to stay somewhere. We didn't have any problems then. I have a friend who just finished debt counseling and their credit score is 630. Not great, but I have known much worse.

Good Luck!

Avatar for cl_phocid
iVillage Member
Registered: 03-26-2003
Tue, 03-07-2006 - 10:20am

Hey Liz - I'm sure if you did a poll of many of the folks on this board, we have *all* done stupid spending.

All my best,
Danni

iVillage Member
Registered: 01-25-2006
Tue, 03-07-2006 - 12:14pm

Liz,
Good information...thanks for bravely sharing. By the way, I too am in this boat due to mindless spending. Easy trap to fall into so don't beat yourself up over it.

Well, I was hoping the answer would be a little clearer. I guess my suggestion would be to try and do something about those interest rates yourself(I agree, they are criminal) by either attempting to negotiate with the creditors yourself (do you have a string of on time payments that you can make a case that you should be removed from that penalty interest rate?), moving the balance to another existing account with a better rate, applying at your bank or credit union for a loan at a better rate or last resort, attempting to open a new credit card with a decent life-of-balance rate for balance transfers. If you could succeed with that, then you can move forward as you mentioned with snowballing down the debt. If you fail to improve the interest rate yourself, then you could go with CCCS because they WILL be successful renegotiating them.

I'm glad to hear your fiance is aware what is going on. I'm not sure what his financial picture looks like but if he can help you stay above water on the mins while you try some of this negotiation stuff, it will benefit him greatly in the long run to preserve your credit rating.

Regardless of what choice you make, you will recover from this eventually.

Peg

iVillage Member
Registered: 07-03-2005
Tue, 03-07-2006 - 12:28pm

Thank you ladies, for all of your advice.


My fiance has great credit.. Perfect really.

iVillage Member
Registered: 04-10-2003
Tue, 03-07-2006 - 12:39pm

I haven't read the other responses yet, so I hope I'm not duplicating information.

I was a client of CCCS until January of this year (total of 2.5 yrs). I actually got a new mortgage on my home with a cash out option to pay off the remainder of my debt. I still had about exactly what your cc debt is left after the 2.5 yrs. ugh.

At any rate, when I pulled my credit report, each creditor said "pays as agreed" but some had a note at the bottom that said "under credit management" or something like that. My credit score was still pretty good, considering the debt to income ratio. I think it has some neg effect, but that is far less than the neg effect derived from late payments. Given the amount of my cc debt and the interest rates that I had been jacked up to, it was a very good decision on my part.

Hope that helps.

iVillage Member
Registered: 07-03-2005
Tue, 03-07-2006 - 3:16pm
Thanks, jacysmama.