You've undoubtedly seen advertisements for companies claiming that they can reduce your credit card debt by as much as 50 percent. These companies specialize in debt reduction, and they attempt to settle your debt with your credit card companies for less than you owe. However, these debt reduction programs are not all they seem to be; though they claim to repair your credit, they may do more harm than good.
Debt Reduction Process
The obvious goal of a debt reduction program is to slash the amount you owe on your credit cards to a reasonable amount so that you will be able to pay the balances yourself. The way this is usually done is ceasing payments on your cards in order to save money for a settlement. The theory is that once the credit card company sees that you're not making payments, a settlement is better than getting nothing from you.
Risks of Debt Reduction
Owing to its model of encouraging you to not pay your bills, debt reduction poses many risks. One of the biggest risks is that you may get sued by your credit card company, particularly if you don't pay your bills for many months. Another potential problem is that while you're not paying your bills, you're accruing interest and late fees. These extra expenses will be included in your settlement, thereby reducing, or even nullifying, any savings you might have otherwise received.
Impact of Debt Reduction on Your Credit
If you choose to go on a debt reduction program, you can expect to pay a serious price in terms of your credit. Your bills may go down, but the chances of getting credit in the future may be destroyed. For starters, your history of past-due payments you've incurred while saving for a potential debt settlement will remain on your credit report for seven years. Furthermore, any accounts you close out through debt settlement will be indicated as such on your credit report. An account that is considered to be paid as agreed instead of paid in full shows that you could not hold to the terms of your initial credit agreement, and that is sure to show creditors that you are a high-risk borrower.
Debt Reduction Scams
The risks of debt reduction are clear, and that's assuming your debt reduction company actually does what it's supposed to do. Unfortunately, even that is far from a given. According to the Consumer Federation of America, reducing your debt through settlement is nearly impossible to do, and the claims of all debt settlement program providers should be taken with a grain of salt. When you contract with a debt reduction agency, you're just as likely to get your debt settled as you are to end up with nothing -- and if you pay the agency up front, you may end up with far less.
Debt Management Programs
A more reasonable alternative to debt reduction is to deal with a debt management agency. Debt management agencies don't claim to reduce your debt; however, they may be able to lower the interest rates on your credit cards. Such an arrangement would truly help you to repair your credit, as you won't have to worry about late fees; in addition, accounts paid off through debt management programs are reported as paid in full. However, while debt management agencies may seem more legitimate, some are just as crooked as debt settlement companies, so use caution before entering any arrangement with a company that may affect your credit.
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