These days, your credit score can affect everything, and bad credit starts a vicious cycle: You're overwhelmed with debt, so your credit score drops. Your credit score drops, so the interest rates you pay go up. High interest pushes you farther into debt. To escape this cycle, it's tempting to turn to a debt negotiation or "credit repair" or "credit correction" company.

Usually for an up-front fee, credit repair companies typically agree to contact all of your creditors and convince them to give you a break. Some companies promise to reduce your interest rates or monthly payments - even your total debt. Others promise to "clean up" your credit report so you can deal more favorably with lenders.

It's always good to be skeptical of things that seem too good to be true, of course. Bankruptcy attorneys, consumer advocates and non-profit credit counselors have been sounding the warning about for-profit debt negotiation companies for some time now.

These companies -- especially those that charge up-front fees -- are often mere scams. At best, they are probably powerless to do anything you could not easily do for yourself.

That's what a retired couple, Alan and Andrea Rademan of Beverly Hills, recently found out, according to a Los Angeles Times article. The couple lost most of their retirement savings when the stock market collapsed in 2008. Alan Rademan planned to continue working, so he took the risk of running up around $100,000 on credit cards. Before he could pay them off, he had to stop working for an extended period due to back surgery.

"I know it was reckless, but I'd done it before," he said in the LA Times interview. "I thought I'd be able to pay off the cards while they were still at zero-percent interest. I was wrong."

The couple then paid a Tehachapi company, DEC Credit Corrections, a $1,000 up-front fee to help them with their debt. At the time of the interview, they had heard nothing from the company for six months.

Make Sure Everything Is Spelled Out in Writing

Examining the contract they signed with the company, they now realize that most of the "promises" they remember were verbal. The written contract never promises to reduce their debt. It offers no guarantee that the company will actually improve their credit score. It also provides no recourse if they are unsatisfied with the company's work.

DEC Credit Corrections was founded by Donna Chavez who, according to the company's website founded it after she herself had a bad experience with a credit correction company. She claims the holdup is because DEC has been waiting for months for essential paperwork from the Rademans.

Whether the deal with DEC was a scam or a misunderstanding, it illustrates an important point: The Rademans agreed to the service based on a verbal sales pitch and didn't make sure their understanding was carried through in the written contract.

"It was dumb to sign it," Alan Rademan admitted. Before you sign any large contract, make sure you understand exactly what you're getting - and what options you have if the deal goes sour. If you're unsure, have a lawyer review the contract before you sign.

Related Resource

"Be wary of 'credit correction' companies" (Los Angeles Times, April 16, 2010)