The Effects of Debt Relief

People deep in debt may rely on debt consolidation companies or debt settlement companies to relieve their debt. While these services do provide a means to tackling high credit card balances and other loans, there are negative consequences to these methods. Before using debt relief programs to get rid of your balances, know the risks.

Mismanagement of Debt

Debt relief companies actually take over your monthly payments and work directly with creditors on your behalf. Their goal involves negotiating a reduced interest rate on your debts, which helps bring down your monthly payments. This method may sound appealing because you no longer deal directly with your creditors. But on the flip side, giving a debt relief company control of your finances is risky. Once you stop making payments to your creditors and begin sending payments to the relief company, they're supposed to distribute funds to each of your creditors. If the company forwards your payments late, this can result in additional fees and a negative credit rating.

Service Fees

Debt relief companies vary. And anyone deciding to take this route should seek out a non-profit debt relief company. Non-profit companies do not charge an initial set-up fee or a monthly service charge. Contact several companies before making a decision and ask questions. Inquire about any services fees, and get a clear understanding of how the process works.

Credit Reports

Using a debt relief company to manage your debt is the same as accepting third-party assistance. Once contacted by the debt relief company, your present creditors will likely update your credit file and report "third-party assistance." Needing help to manage your credit or debt may scare off potential lenders and creditors. This can impact the ability to secure financing in the future, and if lenders detect credit or debt problems, they may increase the interest rate on future loans.

Debt Relief Warning

In order to acquire business, some debt relief companies make promises that they're unable to fulfill. This can include claims to reduce your debt by 50 percent or more. Debt settlements are doable. However, paying a lender less than what you owe can have negative credit consequences. Lenders report the debt as "settled," and this information on your report can damage your credit history, wherein applying for future financing can prove challenging.