Jim’s Mortgage Corner | Immovable
CREDIT ADVICE – GOOD OR NOT IF GOOD
I have recently worked with many borrowers who have used credit counseling to pay off their debt. Credit counseling (also known as debt counseling) helps you pay off your unsecured debt (credit cards, etc.) using a payment plan.
I’m not a fan of credit counseling if your goal is to increase your FICO score. However, if you are struggling to pay off your credit cards and want to avoid bankruptcy, this can be a good option. Usually, you make one payment for all of your debts, and the credit counseling agency will spread the payments across all of your debts. In most cases, they will ask you to close your credit cards that are part of the plan. You will not be able to include your mortgage payment, auto loans, student loans, or other types of secured loans as part of the payment plan.
My biggest concern is how your accounts will be reported to the credit bureaus. As an example, let’s say you have ten credit cards and the monthly payment for each card is $ 75 per month or your total debt is $ 750 per month. The credit counselor negotiates that you will make a monthly payment of $ 400 and apply a payment of $ 40 with each credit card company. However, this does not prevent the credit card company from reporting you late or paying you less since you are not paying what you originally agreed to. In addition, if you have to close these accounts, your payment history and the length of that payment history are no longer taken into account in your score which represents 50% of your FICO score.
The good news is that you will pay off your debt over time, usually within three to five years. The bad news is that your FICO scores can drop from 100 to 150 points or like filing for bankruptcy.
There may be other options if you prefer to maintain your scores. One option is to apply for a consolidation loan that allows you to pay off all of your credit cards and lower your payment. This option can increase your FICO scores because your credit card balances will be low or paid off and you will have established a new installment loan.
Another option is to transfer credit card balances between credit cards, which can spread or even reduce your overall payments.
If you do decide to work with a credit counseling service, be sure to get everything in writing, including when they will start making payments on your behalf. I encourage you to get your credit report for FREE via www.annualcreditreport.com quarterly to make sure these payments are applied to all of your debts and how the credit card company reports your payments.
Finally, a good credit counselor will review your entire financial situation and determine if credit counseling is right for you. Otherwise, keep looking for an advisor who will take the time to do it, as the plan will take up to five years.
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