Do homework on debt management services

A few weeks ago, I wrote about a reader who had $65,000 in unsecured debt and was thinking about using a debt management service to help dig out of the hole.

An official with the Utah Division of Consumer Protection offered some advice in response. And, not surprisingly, those comments drew interest from the debt management industry.

Preston L. Cochrane, president and CEO of AAA Fair Credit Foundation of Salt Lake City, sent me an e-mail to say that his licensed/registered nonprofit credit counseling agency and debt management service provider receives many calls from consumers who have been duped by unscrupulous and unlicensed companies.

He urged me to refer readers who might be thinking of hiring a company to look over some tips on his company's Web site, www.faircredit.org/tipsheet.asp. I've taken a look, and this tip sheet does seem to offer good information.

Preston also wanted to clarify information about the potential impact of using such services on a person's credit score.

"Creditors do have the option of making a simple notation with credit bureaus that a consumer's account is enrolled in a (consumer credit counseling service/debt management provider)," Preston wrote. "This comment may be interpreted differently by different parties who view the credit report.

"According to Fair Isaac … (FICO), 'FICO scores consider a wide range of information on your credit report. However, they do not consider whether or not you are participating in credit counseling of any kind.' See www.myfico.com/CreditEducation/WhatsNotInYourScore.aspx."

According to the Web site, what Preston says is correct.

"Each individual lender decides how to report payment history to the credit bureaus," Preston continued. "Payment history prior to use of a (debt management provider) will not change; however, many creditors will 're-age' accounts.

"Once an individual has successfully emerged from credit counseling with their formerly tattered credit pieced back together, the history of consistent payments is what matters the most. Since the comment comes off the report at the time the account is paid in full, there is no lasting negative effect on the credit report. Negative items such as late payments and high debt-to-income ratios do the biggest damage to a person's credit worthiness and therefore are more cause for worry."