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Credit Card Debt Settlement Companies May Exacerbate Debt Woes

Debt settlement companies are most often for-profit companies claiming they can negotiate with your credit card company to reduce the amount you owe. Credit card companies generally do not have special offers available to only debt settlement firms, so you are paying the debt settlement company for work that you can do yourself.

Credit Card Debt Trouble

The Consumer Financial Protection Bureau (CFPB) says typically, the debt settlement company will ask you to stop any payment and will ask you to stop communicating directly with your credit card company. Stopping payments might have a negative impact on your creditworthiness that you could avoid by working directly with the credit card company. Stopping payments could also result in a lawsuit being filed against you by the credit card company or a debt collector.  

Credit card companies can, and often do, provide alternative repayment options. They depend on, among other factors, your income, how much you can afford to pay, and the amount you owe. They offer loss mitigation programs, sometimes called forbearance or hardship programs. Often these programs let you postpone a set number of monthly payments or pay a lower monthly payment at a reduced interest rate, until you repay the balance in full. If the credit card company determines that you cannot afford a full repayment plan within a certain timeframe, you might be able to negotiate to settle the debt for an amount lower than what you owe. This would depend upon the company’s policies and your account-specific circumstances. Remember to get written confirmation of any alternative repayment option to which you agree.  

Debt settlement companies charge fees–often 20% to 25% (or more) of the settled debt. You may face additional fees as well. You should carefully review all the terms and conditions of the debt settlement company’s fees and know your rights .

To better understand the difference between working directly with your credit card company and working with a debt settlement company, The CFPB says let’s take an example of a $10,000 credit card balance that is more than 120 days past due. This example assumes the credit card company would agree to a 60 percent settlement on a $10,000 debt, meaning you pay $6,000 plus any fees if you work with a debt settlement company.

Another, less visible cost of working with a debt settlement company that has you stop payment on your debt is the potential negative impact to your creditworthiness. When you contract with a debt settlement company, your balance often is not negotiated down and settled right away. This also means that your balance could continue to grow with additional interest and late fees if you stop payments to the credit card company on the instructions of the debt settlement company. 

Depending on your situation, you may wish to contact a credit counselor. Credit counselors can help you manage your money, pay off your debt, and work with you to achieve your financial goals. They may have you make payments on your debt over a longer period, generally at a lower interest rate. They can also simplify the repayment process by allowing you to make one payment each month for all the loans you enroll in their debt management plan. There may be a fee for a debt management program.

Credit counseling agencies are usually nonprofit organizations, and you can find them through an internet search. To get started, you can try the Financial Counseling Association of America , or by phone at (800) 450-1794, or the National Foundation for Credit Counseling , or by phone at (800) 388-2227.

Revolving consumer debt, mostly credit card debt (97%), remained above the $1 trillion level for the seventh consecutive quarter, according to CardData.