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10 debt-consolidation myths

When Norm Bour was 24, credit was so hard to come by he couldn't get a gas station company credit card without begging.

While it's important for you to get a handle on your debt, how you go about it is just as important.

Today, a majority of the home equity lines he approves as owner of Priority Plus Lending will be used to pay off Americans' credit card debts. Nor is his route the only one to spring up in a capitalistic society: Where there's a need, there's a buck to be made, even among the broke.

So you can bet that where competition rules, advertising spin appears. Here are 10 myths about debt consolidation and the truth about them. If you are considering debt-consolidation options, avoid these misrepresentations:

10 debt-consolidation myths
  1. Credit counseling, debt-management programs -- it's all the same
  2. Credit counselors can cut your monthly payments in half
  3. Some companies offer lower interest rates than others
  4. Some agencies can negotiate lower DMP payments than others
  5. Debt settlement is the cheapest way to go
  6. You need a formal program to get out of debt
  7. Debt consolidation always saves you money
  8. DMP helps your credit rating
  9. Bankruptcy will ruin your life
  10. Bankruptcy is no big deal

1. Credit counseling, debt-management programs -- it's all the same.

Credit counseling involves helping consumers develop a budget and the discipline to make steady payments to clear their debt loads. In a word, it's education. "Most of these individuals make a decent living, but at the end of the week don't have enough money and don't understand why," says Joel Greenberg, president of New Jersey-based Novadebt.

Debt-management programs -- or DMPs as insiders like to shorten it -- are one tool in the credit counselors' kit. Basically, the DMP plays policeman, taking your monthly lump-sum payment and distributing it to your creditors until the accounts stand at zero. They then close those accounts. According to Greenberg, less than 35 percent of the people who call consumer credit counseling agencies truly can benefit from a DMP.

2. Credit counselors can cut your monthly payments in half.

No such luck. This is a numbers fudging claim that holds true only in the narrowest of circumstances. For instance, if you miss two $200 payments on a $10,000 balance, the third month's bill will make it $600 that you owe. DMP personnel re-age that bill, knocking your payment amount back to $200. You haven't escaped anything -- the missing money was merely tacked back onto the total owed.

And most folks who walk through his doors haven't missed payments, says Greenberg. These harried souls will see a bit of relief from an interest reduction, but by no means will they magically owe only half their bills.

3. Some companies offer lower interest rates than others.

It drives Richard Musci, chief lending products officer at Schwab Bank, crazy to see teaser ads for low interest rates on home equity lines. Any quotes that fall within prime minus 75 basis points to prime plus 2 percent are reserved for those who make the A credit list. Those lower down the credit spectrum can expect to strike deals for prime plus 4 percent or 5 percent, not to mention a point or two in fees.

"They're using it to get people in and take them so far down the road that by the time they sign the loan papers, they're committed. They don't want to start all over again," he says. It also serves a second devious purpose: lower advertised rates push these companies to the top of the search engine lists.

But just how low is too good to be true? Bour's rule of thumb: If 90 percent of the lenders are advertising a 5.75 percentage rate, the lone shark waving even a 5.25 should send up a red flag. "But it doesn't because people always think they're smart enough to find the deal no one else has," he says.

4. Some agencies can negotiate lower DMP payments than others.

That would be true if these debt-management programs involved negotiation. They don't. A majority of creditors have existing programs where they automatically shuffle off 95 percent of individuals enrolled in a DMP, says Greenberg.

If a counselor indicates differently, you are in the clutches of a debt-settlement program. This version accepts your monthly lump-sum payments, but holds that money until creditors scream. At that point, the debt-settlement personnel negotiate to repay cents on the dollar. Your credit rating gets maimed in the process.

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