Being Wary of Certain Credit Card Deals (One Step Forward, Two Steps Back)

June 01, 2007

Credit card deals can provide customers with a great and convenient way to channel their budget. Many people sign up for great credit card deals and through the utilization of diligence and discipline are able to easily and steadily manage their budget through their credit card purchases. These are the people we’d all like to be, the ones that seem to have been born with good money management skills and the ones that never seem to be tempted by that ever alluring impulse purchase.

For other people, something can start off as a great credit card deal and end up being a credit card nightmare. These people sign up for credit cards thinking that they’ll just use them as a convenient method to budget, until they start being presented with impulse buys. The first impulse buy leads to the second, the second to the third and so until they’re mired in a mountain of debt so high that they can’t even remember how they got there in the first place.

And don’t expect much help from the credit card company once you get yourself into this situation either. The best you’ll get from them is a fake sympathetic ear while they listen to your tale of woe after which they’ll jack up your interest rates and force you to make larger minimum monthly payments. The credit card company is not there to be your friend; they’re there to make money from you.

It’s at this point that people with bad credit usually come across two aspects of the debt business that make them think that there might be light at the end of the tunnel: Debt Management Plans and Debt Negotiation Programs. The former should be approached with caution and the latter is usually an outright scam. So how do you understand and protect yourself? Well, this article will give you a short introduction on how to do just that.

Debt Management Plans

People that are considering these plans are usually people that have already gotten themselves into bad shape. People that have an extremely poor credit history and have already tried everything else. These might be people that initially tried other avenues to fix their debt problems and might have even been successful for a while. But for one reason or another (usually because of a lack of discipline) they’re still in a very large debt problem and may even have started to morosely consider the possibility of being forced to declare bankruptcy.

In the event that there’s nothing else to do, as a last resort, a credit counselor might recommend that these people turn to a Debt Management Plan. A DMP is an agreement between you and your creditors with the counselor or credit agency as a go-between. You and your creditors will essentially agree to terms of a deal that provide a plan of repayment that a) is financially affordable by you and b) acceptable in terms of the monthly payments that you’ll be making to your creditors. This is a method used by many people that have either overextended themselves by signing too many credit card deals or have done something else ill-advised to push themselves into a bad credit situation.

Do DMPs work? If the schedule is affordable and rigidly adhered to, yes they do work. But be very wary when you choose a counseling agency to work with. A reputable credit counseling agency will be like a reputable credit card company. They will offer you free information up front and once you agree to work with them, you should only be charged after the agreements have been put into place. Agencies that ask you for an exorbitant amount of different payments should be avoided at all costs, as these types are just after your money and have no real attention of putting any effort into helping you.

Debt Negotiation Programs

These are usually the biggest scams around and for very good reason. Generally people tend to lose their common sense and fall for a trap laid by someone offering something that seems too good to be true and for people that have a poor credit history, that’s exactly what most DNPs do. Building credit (or repairing poor credit) is something that can only be done over the long term, but these companies guarantee immediate results of a) a reduced amount of debt and b) a clean credit report. How can they do this you ask? Well they can’t, but they can make it seem like they did. Here’s how:

In regards to part A, they tell you immediately to stop paying your debt down (usually exacting a consulting fee up front and demanding monthly payments to keep working for you). After a few months have gone by, they then go to your creditors and threaten them to lower the amount of debt, citing that if they want to get any of it back they should make things easier on you. The creditors might be willing to do this, but any amount they write off will become considered income, so even though you have less credit debt, you’ll end up with more tax debt.

In regards to part B, they will dispute everything that’s on your credit report. The credit bureaus will remove the disputed information while they investigate and the DNP will then send you a copy of your credit report. Since everything is under investigation, nothing will appear on that particular report and what is really a bad credit history might appear to you to be a good credit history. The DNP worker will then extract payment from you and a few weeks later when everything gets confirmed by the bureau and re-added to your report, the DNP will have conveniently stopped returning your calls.

Fixing Credit Decision

Fixing credit can be done, but it is a long-term procedure. DMPs can work if adhered to rigidly, but should only be used as a last resort. Avoid DNPs entirely as the vast majority of them are nothing more than glorified scams.