Think Twice Before Settling your Credit Card Debt

by Matt B

Credit Card AppThere is absolutely nothing wrong with calling your creditors to negotiate rates or to ask for a break on fees. A better deal can often be granted from nothing more than a 5-10 minute call. I highly recommend it. Especially if you carry balances on your credit cards.

On the other hand, there definitely is a downside to settling your debt. Many people as of late are just too far in debt and looking for a way out that does not require bankruptcy. While avoiding bankruptcy is important, so is protecting your credit score. A settlement on a debt or multiple debts may seem like the right idea, but you may not be aware of it’s effect on your credit score…which can sometimes be as damaging as a bankruptcy.

In an attempt to avoid losses at all cost, credit card issuers seem more eager than ever to come up with a settlement plan. In a bankruptcy, the creditor gets nothing. But if the debt is settled for a discounted rate, the company takes a loss, but it is far less severe than getting nothing at all.

Pennies on the Dollar-

Credit consolidation companies often advertise settlements reached for much less than is owed. In their attempts to lure you in, they often neglect to inform their customers that this will severely damage credit scores. There are very few non-profit consolidation firms. This means that many companies offering “credit counseling” services are just trying to make a buck at your expense. Often, these consolidation firms offer little more than a payment plan that saves you a very small amount (or nothing at all) in interest over the repayment period.

Second to Last Resort-

If you are willing to let your credit score take a hit, and you are on the verge of bankruptcy, a settlement may benefit you. Bankruptcy should be the absolute last resort, but if you are considering it, you should also consider whether a settlement would benefit you. It will hurt your credit, but if it helps you get your life back in order, isn’t it worth it? How much less is it than the debt? How long could it take to rebuild your credit? How long will it take to settle the debt completely? Consider these questions and others before deciding which path to take.

Debt Consolidation Companies’ Fees-

Most credit counseling services who offer settlements or payment plans have fees that must be paid. These fees are planted within your payments, but are often unadvertised and hard to get. From MSN Money:

Just how much will you pay? Good luck finding that out.

“I’ve never seen a company that’s given a straight answer,” says Loonin. The industry’s fees and fee structures are all over the place. Some companies charge a percentage of the total debt — typically 15% or 18% — that’s paid before you start accumulating savings. Others charge a percentage of the debt savings — usually 25% — once you settle, plus an initial sign-up fee and monthly service charges. Then there are those that charge a flat monthly fee throughout the length of the program.

You will find that even if you do your research, it still may be hard to find a straight forward answer as to exactly what fees will be levied on your settlement. If this is the case, avoid the settlement at all cost. If there is no language in the contract regarding set fees, there is a chance that the company can change them during the payoff, potentially costing you thousands more throughout the payoff term.

How to Decide-

Nobody can tell you one way or the other what is best for you. My first recommendation would be to do the math. If your total payoff amount is enough savings to salvage your credit in the long term without leaning toward bankruptcy, go for it. Just make sure you are not getting swindled by the organizer of the settlement by way of fees that are not crystal clear.

If you can put together a plan to pay off your debt without outside assistance, do it. There are always ways to get some extra money and slim your debt obligations all by yourself. If you do decide to utilize a credit counseling service or a consolidation firm, know every variable within the pages before you sign anything or agree to any terms. You do not want to get the rug pulled out from under you by a surprise fee or unexpected expense.

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