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You’ve probably seen the ads that claim to consolidate your credit card debt with no upfront fees. Some say they’ll reduce interest rates and give you lower monthly payments. If you’re in a rut. this may seem like an easy alternative, better than dealing with banks or credit card companies. But if you don’t do your research and rush into signing your debt over to a third party, you could end up ruining your credit.
That’s what happened to 58-year-old Jacqueline Brown*, a professor of philosophy in Atlanta. Brown, a single parent, found herself $35,000 in debt with eight credit cards after sending her daughter to a prestigious law school. Her $73,000 a year salary wasn’t enough to handle the $161,000 in tuition plus expenses. When she saw a classified ad offering to make her payments easier, she thought she’d found a quick fix answer to her problems.
“It wasn’t that I was behind in my bills [but] I was looking for the lower interest rates that would help me lower my monthly payments,” Brown explains. Her interest rates averaged about 19% for each card. She called an 800 number and was put in touch with a representative who explained how the service worked. Brown would make one payment to the service who, in turn, would negotiate lower interest rates and make monthly payments on her behalf to the creditors. To Brown, it seemed less costly than dealing with a bank or taking out a loan. She received a contract in the mail, quickly signed it, faxed it back and mailed her first payment of $800.
“I sent payments ahead of time to make sure all accounts were paid,” she recalls. A few months later, she became concerned by late bill notices and called one of her credit card companies, who revealed that it was reluctant to do business with the the service, since it was for-profit. She later found the contract to be misleading; she was told that no upfront fees would be charged, yet her first payment was actually held for fees. That made payments to her creditors late and tainted her credit record.
“I called the Better Business Bureau to report the company, and in the meantime, I started making payments myself to get my accounts caught up,” she says. The company did not give her a good reason for the late payments, but said that since they processed thousands of accounts, a few may have slipped through the cracks. The Better Business Bureau had received dozens of complaints against the company, and gave it an unsatisfactory rating. Brown wrote to each of her creditors, explaining that she dropped the service and asked that her credit be restored while she made payments directly.
What Brown experienced is not unusual, says Bud Hibbs, a consumer credit expert and author of The American Credit System: Guilty Until Proven Innocent. “Usually when people go to these services, they are already in trouble,” he says. “What most credit counseling services do is they collect your