People who get in over their heads in credit card debt sometimes seek to settle their debts to get into a better financial position. While you can use credit card debt settlement to your advantage, be careful that the settlement doesn't leave you worse off than you were before. Focus on paying down your debt and avoid common credit card debt settlement mistakes.
Ignoring Your Credit Score
Some people who get into credit card debt look toward settlements as an ideal solution. A credit card settlement agreement usually allows you to pay back a credit card debt for less than the cost of the debt you incurred. For example, if you have a $5,000 debt, you might be able to settle it by offering to pay off $3,000 in one lump sum. While this seems attractive, the settlement will be indicated on your credit report. This will have a negative impact on your credit score and will remain there for seven years.
Accepting Worse Loan Terms
A credit card is a loan, an open-ended loan in which you can borrow as much as your credit card company allows. Some people who settle credit card debts use money from another loan to pay off the settlement amount. You need to be careful that the new loan terms aren't worse than the terms of your old card. If, for example, your credit card company charges you 12 percent APR interest, taking out a 20 percent APR loan to pay the settlement can quickly leave you worse off than you were before.
Not Paying Down the Principal
When people use a new loan to settle credit card debts, they sometimes get attracted to the prospect of lower monthly minimum payments. Just because you are paying less each month doesn't mean you're paying less overall. Lower monthly payments just mean you'll end up paying more in the long term because the loan lasts a longer time, therefore charging you more interest fees. While low monthly payments may seem attractive in the beginning, always look at the long-term outcome to determine how much you actually end up paying.
Closing Your Old Accounts
Many people who settle a credit card or other debt often think they'll be better off once the debt is paid so they can close the account for good. While paying off the balance of any debt is good, closing an account can have a negative effect on your credit score. How long you've used your lines of credit makes up about 15 percent of your credit score, and closing an account will only leave you with one less account history that creditors can look at.
Falling for a Scam
There are a host of companies offering "debt settlement" advice and planning. Be very careful when considering these offers. There is nothing preventing you from negotiating your own debt settlement terms, and companies offering to do it for you for a fee or percentage of your debt are often scams. If you do choose to use a service, research the company through the Better Business Bureau or your state's attorney general's office. You can also contact the Department of Justice for a list of government approved credit counseling services (see Resources).
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