Eliminate Credit Card Debt

They assumed that would let them eliminate their debt while avoiding further damage to their credit report. But one consumer advocate says turning to such counseling services can actually destroy a person’s credit rating just like a bankruptcy does.

Blair Drazic, a former assistant public defender for the city of St. Louis and author of the book “Forgive Us Our Debts,” offers a warning to those in financial distress: Avoid consumer credit counseling.What most credit experts don’t tell you, Drazic said, is that the use of a consumer credit counselor or debt management program is reported as a black mark on your credit report. And that black mark could stay in place for seven years — nearly the same length of time as a bankruptcy filing — even after late payments and debts are brought current.

The “credit devils” — a term Drazic uses for the credit industry - - run a system of “extortion and blackmail, where they can legally take the food from your children’s mouths . . . through late fees and usurious interest rates,” he said.

Drazic said high interest rates and exorbitant late fees are compounded when working people seek out the services of credit counselors in order to pay back their debts, only to find in the end that their credit rating has been dashed.

So instead of turning to credit counselors, who typically act as a go-between for consumers and creditors, Drazic said it is better to go it alone, working directly with creditors.

David Jones, president of the Virginia-based Association of Independent Consumer Credit Counseling Agencies, said working directly with creditors is one option consumers can take, but he denies that using a credit counselor will mar a credit report.

“That’s not going to be listed on your credit report for seven years,” Jones said. “There will be a notation on the credit report that you engaged in a debt management program through credit counseling. That’s typically seen by most creditors as a positive thing, not a negative thing. That comes off when you graduate from the program and pay your debts off.”

Yet Evan Hendricks, author of “Credit Scores and Credit Reports,” said that while the use of a credit counselor does not automatically lower a credit score, which assesses a consumer’s credit risk level, potential lenders who review a credit report may turn down a loan request upon learning that a consumer used the services of a credit counselor.

“There’s no question that some lenders would look at it in a very negative way,” Hendricks said. “The mortgage area is the one where they’re most likely to look at the entire credit report, not just rely on the score.”

And Hendricks agrees that skipping a credit counselor is the better choice when financial hard times are encountered.

Heather Greer, a spokeswoman for Experian, one of the three main credit reporting bureaus, said in an e-mail response to Deseret Morning News questions that accounts paid off through a credit counselor are listed as “settled” on a credit report.

“A special comment indicating the payments are being managed by a credit counseling agency will appear with the account on the credit report,” Greer said. “A ‘paid, settled’ status would remain with the account until the account is deleted, accurately reflecting the final status of the account with the lender.”

That “paid, settled” status, Drazic said, won’t be deleted off a credit report for seven years.

Janet Bodnar, a columnist for Kiplinger’s Personal Finance, said in a recent column that while a debt management program can erase debt, “it doesn’t necessarily get rid of black marks on your credit report. Those stay on your record for seven years.”

In recent years, the debt management industry has come under fire for promising to improve credit reports while charging high fees.

Twenty-eight credit counseling or debt management companies are registered in Utah, according to Francine Giani, director of the Utah Division of Consumer Protection.

One Utah company, the Consumer Credit Counseling Service of Utah, earlier this year was accused by the state of mishandling client funds, causing client payments to creditors to bounce.

The Brimmers were among the victims. The couple made $376 monthly payments to CCCS to pay down $17,000 in credit-card debt.

 

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