Dear Dave: I have a friend with $30,000 in credit card debt, an $80,000 second mortgage, and a car loan. She makes about $70,000 a year, and is considering using a credit counseling service to help. They say they can negotiate her credit card debt down to almost half of what it is now, but there's an 18 percent fee attached for their services. What are your feelings about this?
This is a bad idea for several reasons. For one thing, it will virtually destroy her credit with regard to buying a home. Almost every lending institution will look at using a credit counseling service as if she had filed Chapter 13 bankruptcy.
Here's something else to think about. Some of these "counseling" companies withhold credit card payments until the account is three to six months past due. Then, they contact the lender and negotiate to settle the bad debt. See where I'm going? That's how they get negotiated discounts on credit card debt. Card companies don't settle on your debts when your payments are on time.
These services are always a bad idea, and sometimes they're a complete scam. Some of them will go as far as to request power of attorney. Believe it or not, many people who are in debt are either naïve or desperate enough to sign this control over to them!
Your friend needs to handle this herself, and the best way to do that is by making her money behave, and creating and living on a monthly budget. Tell her to sell some stuff, or pick up an extra job on weekends. It would probably be a good idea to sell that car she's financing, and find a cheap, little beater to drive around, too. Regardless, she's got some tough decisions and hard work ahead if she wants to free up her cash flow, and clean up this mess the right way!