Americans now have nearly four trillion dollars in bank card debt, and the average household has nearly $10,000 in credit card obligations. With rates of interest that average 20% annually year, this debt grows faster than overwhelmed consumers can pay it off. With interest rates rising and more and more consumers struggling to pay their bills and retire their debts, more and more consumers are thinking about debt settlement companies as a solution to their credit card debt">credit card debt. Is that a great idea?
Debt settlement agencies claim that they can make a deal with your creditors in order to obtain a settlement for a “fraction” of the amount that you actually owe them. Some of them market that they can save you up to 50%. Can they do that? Should you use these companies?
Such offers should generally be taken with a grain of salt. It may be possible for a company to negotiate a lower rate of interest or a reduction in late charges, but it will be much more challenging to get a creditor to lower the amount of the principal that they are owed. In order to get the creditors more excited about negotiating a deal, a lot of settlement corporations encourage their clients to stop paying their bills and to stop talking to the creditors completely.
If you stop repaying your bills and talking to your creditors, numerous things will happen:
- You’ll incur penalty fees from your creditor.
- Your rate of interest will probably go up.
- Your failure to pay will be noted on your credit report and reflected on your FICO score, making it harder for you to borrow money later on.
- Your creditor may be more willing to settle for less than the full amount owed.
Yes, you might get a reduced settlement, but it may hurt you more in the long run than if you just paid the cash that you owed. Remember that these settlement firms will not work for free, either. A few of them charge fees that run into the thousands of dollars and these fees are generally taken out before any cash is applied to your debts.
Before you choose to do business with a debt settlement organization, ask to see all of their terms in writing. Watch out for “guaranteed” results that promise you savings of set amounts, such as “50%.” There is no way to guarantee how a particular creditor will respond to negotiation. Ask about the fees they charge and how the money that you pay them will be applied to your debts. Be careful if they suggest that you stop talking to your creditors and/or suggest that you stop paying your bills.
There are legitimate institutions out there that can assist you get out of debt, but there are hundreds of companies that are just serious about taking your cash. Be careful.
