How’d you like to lower your monthly credit card and loan payments — guaranteed? It’s an offer that sounds mighty appealing to anyone struggling to pay their bills. A growing number of companies across the country claim they can do this by either lowering your interest rate or reducing the amount you owe.
But beware! Some of these debt relief programs are scams run by con artists who can’t deliver on their promises. If you fall for their pitch, you could lose hundreds of dollars in fees and find yourself in worse financial shape. You’ll owe just as much as when you started, plus have additional late fees and other penalties to pay.
Carol in North Carolina was willing to share her personal horror story with me as long as I did not use her last name. It started with a phone call from a debt management company. The representative told Carol she could get her creditors to lower their interest rates. This would let Carol pay off her credit card, mortgage and car loan debt three to five times faster.
“She specifically told me that I would save at least $2,500 in a very short time and would likely save much more,” Carol states in her declaration to the Federal Trade Commission.
Carol was skeptical, especially when she heard the price was $499. But the salesperson assured Carol she would see lower interest rates within the first 30 days of the program and that these savings would more than cover the fee.
“She spoke with such confidence and zeal that I was moved to tears,” Carol says. “I was thrilled and full of hope to know that I would finally be able to pay off my debts.”
But it didn’t turn out that way. Despite repeated attempts, Carol’s “financial consultants” could not lower the rates on any of her credit cards. The company will not refund Carol’s $499 fee as promised. The Federal Trade Commission has sued the firm.
A widespread problem
In the last few years, the Federal Trade Commission has sued more than dozen debt relief companies. “They simply lie to consumers,” says the FTC’s Alice Hrdy.
FTC ad IRS investigators have also found some counseling services that claim to be non-profit when they are actually a for-profit company. The non-profit pitch can make a potential client feel confident about signing up for the service. “They’re preying on the consumer’s trust,” Hrdy says.
Some of the bad apples in this industry mislead people about their charges. “They either say there are no fees involved or just a small fee,” Hrdy explains. Sometimes, they don’t mention fees at all.
Bruce, who lives near Seattle, signed up with a company that promised to lower his interest rates. He was told to send them a check for $265.
“It was my clear understanding that money was going to pay off my credit card bills,” Bruce told me. It turned out to be a “referral fee” to find him a company that would supposedly help him.
“It was a nasty experience,” Bruce says. “They basically stole my money.”
Warning: Debt settlement programs
Some companies now claim they can negotiate a one-time settlement with all of your creditors that will reduce your principal by as much as 50 to 70 percent. By doing this, they say, your monthly payments will drop dramatically.
“That is virtually impossible under any circumstances,” says Travis Plunkett, Legislative Director of the Consumer Federation of America. That’s why CFA warns consumers not to use debt settlement programs. “They are promising something they can’t deliver,” Plunkett says.
Credit counselors — a better option
Charles Helms, president of Consumer Counseling Northwest, sees a lot of people who have been burned by these phony debt relief programs. “It’s horrible,” he says. Because most of them have a large up-front fee, they’ll take anyone who can pay.
“Their goal is to get you to sign up, not to successfully complete the program,” Helms says. “So here’s someone who is financially damaged to begin with and then these companies just go out and take the last of their resources and kill any hope they have of getting out of that situation.”
With a legitimate credit counselor, there is no right answer for everyone. They sit down with you and give you a free and objective assessment of your financial situation. At Credit Counseling Northwest, they saw 6,000 people last year and found that debt management was the right option for only 19 percent of them. The rest were given a plan to work things out on their own.
With a customized consolidated payment plan you should be able to pay off your credit card debt in 3 to 5 years. You write the counseling agency one check each month and they pay all your creditors.
Do your homework
Facing mounting bills can be frightening, but getting debt relief is not a decision that should be based on hearing a radio commercial or getting a sales call. You want to find an organization that will design a debt relief plan specifically for you.
Shop around. Compare a couple of services and get a feel for how they operate. The credit counselor should spend at least 20 to 30 minutes with you in order to get a complete picture of your finances. If they don’t do that, you’re not really getting any counseling.
Ask a lot of questions and get those answers in writing. Find out about the fees. The Consumer Federation of America says you shouldn’t pay more than $50 for the set-up fee and no more than a $25 monthly maintenance fee. If the agency is vague or reluctant to talk about fees, go someplace else.
Don’t rely on names or the claim of a non-profit status. Check them out with the Better Business Bureau or your local consumer protection office.
By doing your homework you should be able to find a service that doesn’t over-charge or over-promise. Here's a good place to start: The National Foundation for Credit Counseling. They'll help you find a certified counselor near you.