Debt Consolidation- Beware!
By sevp onI had a relative that recently tried debt consolidation. He wasn't too far into debt where he couldn't pay his bills, but he was getting nowhere fast trying to pay down credit cards. He tried debt counseling/consolidation with a company called Money Management International or MMI.
He told me that after calling MMI, they claimed they could reduce the interest rate on a lot of his cards by almost 1/2 in some cases. They were only going to charge $5 per account.I went over this with him (I'm protective of my relatives!) by combing through their website and looking at the fine print.
It seemed like a legitimate business that wasn't out to rake to for all your cash. You could even manipulate the amount of money that goes to each account, so it isn't in total control of MMI. The biggest stipulation is that MMI requires withdrawal of their payments from a checking account. So if you don't have one, better get one!
About three months later my relative said that he was satisfied with the program and was surprised by some of the details. One credit card's interest was cut from 19% to 9%. I didn't see all his bills but he was able to determine how much or little was paying off the cards. MMI told him that he needs to update the status of his bills online every few months so that he doesn't get shafted by the companies. They even said that if you pay down one bill they can automatically direct those funds to the next lowest bill.
The biggest catch, however, came six months after starting with the company. My relative tried to apply for credit at a car dealership. When they reviewed his credit report, it showed that all the bills he had were in debt consolidation. Instead of everything being lumped under MMI, all the bills were still separated and showing under debt management! This could be a hindrance if people see that for seven years and don't understand the difference between being in the hole and managing your debt.
So what I learned from him is that if you are seriously behind in payments or don't like having your head just above water, debt management and counseling with MMI is the way to go. If you just want to reduce your "outgoing" debt by lowering credit card interests through MMI, it may haunt you on your credit report! And MMI doesn't mention this on their site.
You know, here in California under bankruptcy laws debt mamagement is equated with that phrase, so it would be a total negative in the eyes of potential creditors. MMI should be clear about their stance on what they offer.
I have had a couple of friends go through this. When they signed up for the dept management services they had to sign a form that they would not use their credit cards and would not borrow any money from any type of creditor for the length of time it took to completely pay off all of the bills with the company. It sounds to me like your family member might have been better off first trying to speak with the lenders themselves before signing up for the services offered by MMI. While he most likely would not have done as well as he did cutting down the interests rates, he may have been able to manage it down enough to be able to handle more easily. If he couldn't then he still had the opportunity to sign up with MMI. Hopefully this experience has taught him a valuable lesson and he will be able to keep his financial debt down to a level that is more manageable.
I wonder how many unhappy people who signed up with these type of companies, wish they had never done it. I had no idea that it hurts your credit report. Sounds like they don't want you to know that either.
Watch out for the unexpected 1099. My friend went through one of these and found out the next January that he was going to have to pay tax on the amount written off by his creditors.
It sounds like your relative found this out the hard way unfortunately. I didn't even know that this could effect your credit score.
Your credit is affected for something like seven years after you use one of these services.
I don't trust any of those debt consolidation places. I don't think they are scams so much is I think they are just sneaky about the way they do things. Errr - is that what a scam is? You don't need to go through a debt consolidation service to lower your credit cards. You can do it yourself. Few people know this.
I am weary of all debt consolidation companies. Thanks for sharing your relatives experience.
There is always a catch somewhere.With the type of economy we have, most people will turn to this type of thing.
Thanks for the excellent information. I have seen these companies and considered using them for interest rate reduction. I don't think I'll go that route now.