By Julie Sturgeon
When Norm Bour was 24, credit was so hard to come by he couldn't get a gas station credit card without begging.
Today, a majority of the home equity lines he approves as owner of Priority Plus Lending will be used to pay off Americans' credit card debts. Nor is his route the only one to spring up in a capitalistic society: Where there's a need, there's a buck to be made, even among the broke.
So you can bet that where competition rules, advertising spin appears. If you are considering debt consolidation options, avoid these misrepresentations:
1. Credit counseling, debt management programs -- it's all the same. Credit counseling involves helping consumers develop a budget and the discipline to make steady payments to clear their debt loads. In a word, it's education. "Most of these individuals make a decent living, but at the end of the week don't have enough money and don't understand why," says Joel Greenberg, president of New Jersey-based Novadebt.
Debt management programs -- or DMPs as insiders like to shorten it -- are one tool in the credit counselors' kit. Basically, the DMP plays policeman, taking your monthly lump sum payment and distributing it to your creditors until the accounts stand at zero. They then close those accounts. According to Greenberg, less than 35 percent of the people who call consumer credit counseling agencies truly can benefit from a DMP.
So you can bet that where competition rules, advertising spin appears. If you are considering debt consolidation options, avoid these misrepresentations:
1. Credit counseling, debt management programs -- it's all the same. Credit counseling involves helping consumers develop a budget and the discipline to make steady payments to clear their debt loads. In a word, it's education. "Most of these individuals make a decent living, but at the end of the week don't have enough money and don't understand why," says Joel Greenberg, president of New Jersey-based Novadebt.
Debt management programs -- or DMPs as insiders like to shorten it -- are one tool in the credit counselors' kit. Basically, the DMP plays policeman, taking your monthly lump sum payment and distributing it to your creditors until the accounts stand at zero. They then close those accounts. According to Greenberg, less than 35 percent of the people who call consumer credit counseling agencies truly can benefit from a DMP.
Debt Management Basics
No matter how deep in debt, you can still work your way out. Get great debt management advice, savings suggestions and new spending habits.
- Debt Management
- Invest or Pay Off Debt
- Using Revolving Credit
- Saving for the Future
- Personal Net Worth
- Personal Cash Flow
- Managing Interest Rates
- Establishing a Budget
- More Money Basics
2. Credit counselors can cut your monthly payments in half. No such luck. This is a numbers fudging claim that holds true only in the narrowest of circumstances. For instance, if you miss two $200 payments on a $10,000 balance, the third month's bill will make it $600 that you owe. DMP personnel re-age that bill, knocking your payment amount back to $200. You haven't escaped anything -- the missing money was merely tacked back into the total owed.
And most folks who walk through his doors haven't missed payments, says Greenberg. These harried souls will see a bit of relief from an interest reduction, but by no means will they magically owe only half their bills.
3. Some companies offer lower interest rates than others. It drives Richard Musci, chief lending products officer at Schwab Bank, crazy to see teaser ads for low interest rates on home equity lines. Any quotes that fall within prime minus 75 basis points to prime plus 2 percent are reserved for those who make the A credit list. Those lower down the credit spectrum can expect to strike deals for prime plus 4 percent or 5 percent, not to mention a point or two in fees.
And most folks who walk through his doors haven't missed payments, says Greenberg. These harried souls will see a bit of relief from an interest reduction, but by no means will they magically owe only half their bills.
3. Some companies offer lower interest rates than others. It drives Richard Musci, chief lending products officer at Schwab Bank, crazy to see teaser ads for low interest rates on home equity lines. Any quotes that fall within prime minus 75 basis points to prime plus 2 percent are reserved for those who make the A credit list. Those lower down the credit spectrum can expect to strike deals for prime plus 4 percent or 5 percent, not to mention a point or two in fees.
"They're using it to get people in and take them so far down the road that by the time they sign the loan papers, they're committed. They don't want to start all over again," he says. It also serves a second devious purpose: lower advertised rates push these companies to the top of the search engine lists.
But just how low is too good to be true? Bour's rule of thumb: If 90 percent of the lenders are advertising a 5.75 percentage rate, the lone shark waving even a 5.25 should send up a red flag. "But it doesn't because people always think they're smart enough to find the deal no one else has," he says.
4. Some agencies can negotiate lower DMP payments than others. That would be true if this debt management programs involved negotiation. They don't. A majority of creditors have existing programs where they automatically shuffle off 95 percent of individuals enrolled in a DMP, says Greenberg.
If a counselor indicates differently, you are in the clutches of a debt settlement program. This version accepts your monthly lump-sum payments, but holds that money until creditors scream. At that point, the debt settlement personnel negotiate to repay cents on the dollar. Your credit rating gets maimed in the process.
5. Debt settlement is the cheapest way to go. Greenberg urges anyone introduced to a debt settlement program to run hard in the opposite direction. "First of all, it's unethical," he says. "It's just wrong to make payments on an account and have the money sit in someone else's pockets until the creditor gives up on the collection calls." The real skunks insert a clause in the contract that says if you miss a payment to the debt settlement company, it keeps all the money in the ante as a fee.
Secondly, this route dings your credit history severely, as all those "pay us now" letters count against you, not the company. Finally, the amount the creditors forgive in the end is considered income for you, and you owe taxes on that amount. "If you're going to take this route, you might as well declare bankruptcy," Greenberg says.
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But just how low is too good to be true? Bour's rule of thumb: If 90 percent of the lenders are advertising a 5.75 percentage rate, the lone shark waving even a 5.25 should send up a red flag. "But it doesn't because people always think they're smart enough to find the deal no one else has," he says.
4. Some agencies can negotiate lower DMP payments than others. That would be true if this debt management programs involved negotiation. They don't. A majority of creditors have existing programs where they automatically shuffle off 95 percent of individuals enrolled in a DMP, says Greenberg.
If a counselor indicates differently, you are in the clutches of a debt settlement program. This version accepts your monthly lump-sum payments, but holds that money until creditors scream. At that point, the debt settlement personnel negotiate to repay cents on the dollar. Your credit rating gets maimed in the process.
5. Debt settlement is the cheapest way to go. Greenberg urges anyone introduced to a debt settlement program to run hard in the opposite direction. "First of all, it's unethical," he says. "It's just wrong to make payments on an account and have the money sit in someone else's pockets until the creditor gives up on the collection calls." The real skunks insert a clause in the contract that says if you miss a payment to the debt settlement company, it keeps all the money in the ante as a fee.
Secondly, this route dings your credit history severely, as all those "pay us now" letters count against you, not the company. Finally, the amount the creditors forgive in the end is considered income for you, and you owe taxes on that amount. "If you're going to take this route, you might as well declare bankruptcy," Greenberg says.
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