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Ulzheimer: Why the 'Debt Settlement' Business Is a Scam

Wednesday, 20 Aug 2008 | 3:49 PM ET

John Ulzheimer is a nationally recognized credit expert and contributor to On the Money. Learn more at Credit.com or JohnUlzheimer.com.


Q. There are several companies offering to cut your debt in half and make one low monthly payment. If you are carrying large amounts of debt is this an option? How bad will this hurt your credit and for how long? I can't seem to get a straight answer on this. --Darrell S.

Ulzheimer: Hi Darrell. I don’t normally use the word “hate” but in this case I have to do so. I hate that debt settlement companies are allowed to use deceptive marketing like this. It’s my opinion that a lot of these guys belong in a 5x9 cell for what they are doing to consumers who are in desperate situations. Here’s the truth about debt settlement companies…

- The first thing they require you to do is stop paying your bills. This causes your credit scores to tank and might even get you sued by the lender or their collection agency. That’s not in their marketing literature or television commercials. Their theory is that they are going to make your credit card issuers desperate so they can ride in on their white horses and offer them some smaller percentage as a settlement. Of course, you can do this yourself.

- Next they ask you to start paying into a fund that they will use to pay your creditors eventually. Of course, you can do this yourself.

- There is no guarantee that your lenders will accept any settlement offers. Of course, they don’t tell you this in their ads.

- They don’t tell you how much of your money they keep as their fees. Of course, they don’t tell you this in their ads.

- They certainly aren’t truthful that settlements are just as damaging for your credit reports and scores as collections, judgments, tax liens, repossessions, charge offs, foreclosures, and repossessions.

If you really are in a situation where budgeting or a debt management program aren’t options then try the settlement route on your own. Why pay someone else thousands of dollars to do what you can do for nothing?


Q.
I filed for bankruptcy six years ago and since have had stellar credit with my FICO's all above 750. Yet with the bankruptcy on my credit score I feel it doesn't matter. In today's market where do I stand? --John

Ulzheimer: Hi John. This is a great example that having a BK isn’t a death sentence. However, there are some lenders that simply won’t touch you while you have a bankruptcy on your credit reports, regardless of what your scores are. This is certainly their choice and it’s not illegal or discriminatory. But, I believe it’s very short sighted on their part.

Most people file bankruptcy not because they’re bad with money and credit but more so because of a life-changing event like a lost job, death in the earning family, medical costs, or divorce. Someone with FICO 750 with a bankruptcy is just as good of a credit risk as someone with FICO 750 without a bankruptcy. That’s how FICO scores work…a 750 is a 750 is a 750. Keep shopping around my friend, you’ll eventually find a lender who is focused solely on your fantastic scores.


Q.
I am a 38-year-old married female. I have a 17-year-old daughter whom I really want to go to college. My credit is horrible. I am currently in chapter 13 bankruptcy. I filed a couple of days after getting married in order to save my home. This was the second time I filed. The first time I filed was again to save my home, after a couple of years on being in bankruptcy I felt that I could handle my finances so I did a voluntary discharge only to fall behind on my mortgage again. My question to you is: can I repair my credit and if so how? --Kimberly J.

Ulzheimer: Hi Kim. The phrase “repair my credit” insinuates that your credit is somehow broken and is in need of fixing. That’s not what’s happening in your situation. There is no way of legally and ethically “repairing” your credit. Sure, you can go hire one of those credit repair scam artist and they’ll send the credit bureaus a bunch of poorly worded dispute letters trying to get negative (and completely accurate) information removed under the guise that it’s incorrect. I’ll give you a hint…you can do that awful stuff yourself and save the $49 per month charge. Do some Googling and you’ll see that a lot of those credit repair law firms (that aren’t really law firms) are in a lot of trouble right now. You don’t want to have your name associated with them.

I’m sorry to have to do this but I’m going to give you some much needed tough love. You clearly don’t know how to manage credit. I’m sorry to get all negative on you but my job is to help you, not to sugarcoat the problem. Credit is a privilege, not a birthright. A good credit report and score is something that you earn, not something you can pay someone to fix.

Everything you finance is costing you much more because of the higher interest rates. Cars, homes, credit cards, etc etc.

It’s very simple….follow these rules and in 5-10 years your credit will be fantastic and you will have done it the right way:

- Don’t take on any credit that you know you can’t pay EASILY.

- Don’t ever miss a payment, even by one day. Pay all of your bills well before the due date, which is not a suggestion. No exceptions.

- Don’t ever apply for credit to save money at a store. Don’t do it EVER no matter what you hear from anyone else. No exceptions.

- Pay back every single creditor every single dollar that you owe them. No exceptions, no matter how old, no matter how past due.

- Don’t ever let your credit card balance get above 10% of the credit limit. And don’t ever revolve a balance and don’t ever have a balance on more than two cards at any given time. No exceptions.

- After you’ve accomplished all of this send me an email bragging about your new membership in the FICO 800 Club.

Good luck Kim. I’m pulling for you!!