When you're drowning in debt, any hope of reducing the amount you owe and getting rid of collection calls and notices may seem tempting. However, debt negotiation and settlement companies can make matters worse by charging steep fees and asking you to make financial moves that will make your credit go from bad to worse.
Credit Negotiation and Settlement
Companies who claim to be able to negotiate with your creditors and settle your debt for pennies on the dollar may be able to do so, but not without a steep price. Creditors are loathe to settle debt for less than you owe as long as your accounts are in good standing; any offer of settlement often comes after your accounts are so far behind that they have been turned over to collection agencies.
Effect on Your Credit
Any time your debt is negotiated to settle for an amount less than you owe, it's detrimental to your credit, which is notated to reflect the fact that your debt was satisfied for less than you owed. No creditor wants to see this, but by the time your credit report is notated with the settlement information, the damage is done; late payments and accounts turned over to collections are destructive to your credit score, shaving hundreds of points off your score.
Unscrupulous Practices
Most debt negotiation and settlement companies do not offer their services for free. Although you will be saving money by settling your accounts for less than what you owe, Aleksandra Todorova warns in an article on Smart Money that fees for debt settlement may range from 15 percent to 18 percent of the total debt to up to 25 percent of the amount you saved by settling. Others charge a flat monthly fee during the time you're enrolled in their program. These fees are in addition to enrollment fees and service charges.
Credit Counseling
If you are overwhelmed by high debt and lots of creditors, your best option is to contact a reputable, nonprofit credit counseling agency where you can get legitimate help with your debt. A credit counseling agency can help you to create a budget, understand how credit should be used and set financial goals. A credit counselor can also help you to enroll in a debt management plan, which works with your creditors to reduce your monthly payments, interest and other fees with the goal of paying your debt off in three to five years.
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