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Dear Dave,

I have a friend with $30,000 in credit-card debt, an $80,000 second mortgage, and a car loan. She makes about $70,000 a year, and is considering using a credit-counseling service to help. They say they can negotiate her credit-card debt down to almost half of what it is now, but there’s an 18 percent fee attached for their services. What are your feelings about this?

Frank


Dear Frank,

This is a bad idea for several reasons. For one thing, it will virtually destroy her credit with regard to buying a home. Almost every lending institution will look at using a credit-counseling service as if she had filed Chapter 13 bankruptcy.

Here’s something else to think about: some of these “counseling” companies withhold credit-card payments until the account is three to six months past due. Then, they contact the lender and negotiate to settle the bad debt. See where I’m going? That’s how they get negotiated discounts on credit-card debt. Card companies don’t settle on your debts when your payments are on time.

These services are always a bad idea, and sometimes they’re a complete scam. Some of them will go as far as to request power of attorney. Believe it or not, many people who are in debt are either naïve or desperate enough to sign this control over to them!

Your friend needs to handle this herself, and the best way to do that is by making her money behave, and creating and living on a monthly budget. Tell her to sell some stuff, or pick up an extra job on weekends. It would probably be a good idea to sell that car she’s financing and find a cheap, little beater to drive around, too. Regardless, she’s got some tough decisions and hard work ahead if she wants to free up her cash flow, and clean up this mess the right way!

Dave

Low-limit card the answer?

Dear Dave,

A while back I filed Chapter 7 bankruptcy. Then, not long ago I saw an article saying the best way to re-establish credit after a bankruptcy is to find a low-limit credit card, make small purchases, then pay it off early each month. I’d like to buy a home in a few years, so what do you think of this advice?

Kim


Dear Kim,

That’s just about the worst advice I’ve ever heard. People file bankruptcy because they got themselves so far into debt they couldn’t get out. If debt has already pushed you into bankruptcy, then don’t you think debt is something you should avoid? Whoever wrote that article is a real bozo!

First of all, don’t worry about re-establishing your credit. If you go three or four years after bankruptcy without borrowing a dime, then you’ll add no new entries to your credit-bureau report. This will help show a potential mortgage lender that you learned from your mistakes the first time around. The definition of insanity is doing the same thing over and over and expecting different results. Getting another credit card after all you’ve been through would be really dumb.
You can’t borrow your way out of debt or into wealth, Kim. If you want to see different results you’ll have to change your behavior!

Dave

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