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Wednesday, May 09, 2007

Good credit card deals or bad credit?

The line between a person with good credit and a person with poor credit is perhaps one of the thinnest ones around, often being crossed with a minor event.

Let’s start with the first case; a person with good credit. They sign up for a credit card deal that they like and start using it in their daily lives. They buy groceries and gas with their credit card as well as all of their other expenses and in doing so are able to track their budget online through the internet courtesy of their credit card company.

They’re very diligent in the use of their credit card and much disciplined in how they spend money. They might make the odd ‘fun’ purchase, but they make sure to never spend much more on their credit card than they can afford. As a reward for all of their due diligence, they end up with an excellent credit score, and everyone lives happily ever after.

Now how about the person with poor credit? Well they get their credit card deal done, just as the person in the first case and have every intention of being as diligent and as disciplined as the first person. Things seem to start out well, but all of a sudden they see something that they really want and go ahead and put in on their credit card, thinking that they’ll just pay it off later with their next paycheque.

The interest will only be a few cents, so how could it hurt? They do this every time they see something they want, making up various excuses (it’s on sale, this is the first time they’ve seen that color, etc.) in order to facilitate their impulse spending and before they even know what’s hit them they’ve run up a huge credit card debt.

They end up making new credit card deals with the noble intention of using them to help pay down their debt but their impulse spending takes over again, making their debt even larger. It is a negative feedback cycle that all started with one innocent impulse purchase that this person made and the person with good credit avoided.

People that get to this point in their lives might be hopelessly lost and confused. They might not have any clue how to get out of this predicament and it is in this very mindset that people are the most vulnerable to really go all the way down the tubes.

Not from the credit card company; their interests are served by you continuing to make minimum payments on your credit card and continuing to accrue interest on your debt.

No, these people with poor credit are in danger from a totally different breed of company; credit repairing agencies and the two programs they offer: Debt Management Programs and Debt Negotiation Plans.

Debt Management Plans
The first danger posed to a person with poor credit is the debt management plan. These are plans made by credit repair agencies between consumers and creditors.

The creditors agree to forgive some of the debt owed to them in exchange for getting some of it back and in exchange the credit repair agency takes money from the consumer each month and distributes it to the creditors (in addition to their own commission, naturally).

Debt management programs, while on the surface seeming to be a decent way to get out of debt, are extremely restrictive and are likely to last for a very long tie. People with poor credit that enter into a debt management program might find themselves stuck with the terms for years while they pay off their outstanding debt. Furthermore, they might find that they are paying monthly commissions to the credit repairing agency for tasks that they could have handled themselves!

Because of the ambiguity involved in these types of transactions and the restrictive terms, it is extremely important that consumers with bad credit are very careful before entering into one. Do your research before hand and know exactly what it is you’re getting yourself into.

Debt Negotiation Plans
Forget about restrictive and ambiguous; many debt negotiation plans are downright sinister! Many of the credit repair companies that peddle debt negotiation plans do so with high pressure sales techniques, so it should come as no surprise to people that many debt negotiation plans are outright scams.

The credit repair agency promises the person with poor credit two things; firstly, they promise to get their debt removed and secondly they promise to get their credit rating fixed completely. How can they do this? Well, the short answer is that they can’t, but in the very short term they can make it seem like they have.

They tackle the debt problem by asking the client to stop making their payments. After a few months they contact the creditors and try to get them to declare the debt as unrecoverable. The problem with this plan is that while you might get out of paying the debt, the money that you spent is now going to be considered your income. So you lose the debt problem, but gain additional taxation.

They tackle the credit rating problem by disputing all of the bad things that are on your credit report. In keeping with policy, the credit reporting agency removes the disputed items while they investigate.

While the items are gone, the credit repair agency sends you a copy of your credit report, which only has the good things left. Pleased with the results, you pay them and go your separate ways, only to find a month later that you still have poor credit.

The bureau has investigated the disputes, found them to be correct, replaced them on your credit report and surprise of all surprises; the credit repair agency has stopped returning your phone calls.

The only way to repair poor credit and turn it into good credit is to show your newfound ability to handle credit wisely. This will take time. Be immediately wary of any companies that promise a quick fix and be even more wary of them if they ask you to pay them up front to do so.

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