debt consolidation myths
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.
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.
"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
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