Debt management and settlement firms promise to help you reduce interest rates, stop fees and even reduce some or all of your outstanding credit balances. These firms do provide legitimate services and often succeed in accomplishing those goals. However, beyond the above promises, there are some items to consider that firms are not too keen on including in their advertising messaging.
They Do Not Always Work
Just because a debt-management or settlement program worked for someone else, it may not work for you. A credit counseling agency working to obtain lower rates on your behalf cannot promise that your card issuers will accept your account into the program. Additionally, settlement offers made to creditors may be countered with less favorable terms or even rejected completely. Although many debt management firms have success with many of their clients, each consumer's debt situation is different so there is no guarantee the techniques that have worked for others will work for you.
Challenges to Your Credit Profile
Although your credit report will not be directly harmed by enrolling in a debt-management program, you can expect that your credit report will suffer as a by product of participating in one of these programs. Accounts accepted into the credit counseling program are often required to be closed at the request of the issuer. This will reduce your overall available credit and may close out your oldest credit account. The debt settlement approach often begins with you stopping to pay your creditors to encourage the issuer to accept a settlement offer. Ultimately, the settlement offer may be accepted not first without racking up a handful of seriously delinquent payment items on your report.
You Will Have to Change Your Habits
Turning to a debt management firm to help you pay off your debt may seem like an overnight solution to your financial woes, but the true solution will come with many adjustments to your current spending habits. First, your debt relief firm will often require payments be made to them each month based on the credit counseling agreement or debt settlement program terms. Late payments on these are not accepted and penalties can be severe. Skipping payments or sending partial payments are no longer options. Additionally, once your accounts are closed or suspended, you will no longer have access to these cards for purchasing power and have to rely on accounts not enrolled or your available cash. Ultimately, to get out and stay out of debt, you will need to start spending less than you earn -- something you likely could not do in the first place.
Long-term Credit Consequences
The more you pay your accounts on time, the better the chances of seeing your credit score improve. However, negative remarks such as delinquent payments or charge-offs can remain on your account for up to seven years. These can provide a long-term drag on your creditworthiness and limit your ability to obtain financing on favorable terms. Additionally, specific issuers may forever blacklist you and any application to the same issue may be automatically rejected -- even after the negative remarks disappear from your report.
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