Consolidating your credit card debt is one way to try to get out of debt and repair your credit, but it isn't the only way. Countless companies offer debt relief services focused on reaching a settlement with your credit card companies for less than you currently owe. This may seem like an appealing option; however, using these debt relief companies can cause significant damage to your credit.
Missed Payments
When you agree to work with a debt relief company that specializes in debt settlements, the company will encourage you to save money for a potential settlement. In most cases, this involves taking the money you would have paid to your credit card companies each month and giving it to the debt settlement company. This gives the company the leverage they need to settle your accounts on your behalf; however, it leaves you with a tarnished payment history. Since paying on time each month is the most important factor of your credit score, this can be devastating to your credit.
High Balances
In addition to negative marks on your credit report for late payments, you can expect to rack up plenty of late fees from your creditors. If you have five cards and don't pay them for six months to save for a settlement, and your bank charges the maximum $35 late fee each time, you'd be charged more than $1,000 in late fees. These fees, along with the interest charged normally, can cause your balances to skyrocket, which then negatively affects your credit. Your credit report will indicate your highest balances for each of your cards; high balances can indicate to future creditors that you're a risk to run your balances that high again in the future.
Not Paid in Full
One of the most devastating items you can have on your credit report is an indication that you didn't pay your bills as agreed. While a debt relief program isn't as damaging as a bankruptcy, all of your settled accounts will show that you paid less than the agreed-on amount. Not only will this significantly decrease your credit score, but creditors may see this as evidence that you're a high risk for credit offers and that they therefore have reason to deny you credit. Consolidating your credit into a loan and paying off your bills would pose no such risk; you'd have your bills paid off in good standing and your accounts would still be open for future use.
No Guarantees
Even if you're not worried about your credit rating, debt relief still carries some risks. Since the decision of whether to settle rests entirely with the credit card companies, there's no guarantee you'll get anything out of the debt settlement process. There's a chance you could save for the settlement, not receive any concessions, and end up with destroyed credit and have much higher balances than you initially had. You must also deal with the harassment of bill collectors, especially as your accounts become significantly past due. Furthermore, credit card companies are well within their rights to take legal action against you if your bills remain unpaid; this legal action can include garnishment of your wages.
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