If you're got a lot of credit card debt and you're unable to meet your minimum payments, a credit settlement might sound like an appealing option. After all, the constant advertisements on TV and radio make it sound so simple. However, there's a dark side to settling with your credit card companies that these ads don't tell you about.
Credit Settlement Basics
In a credit settlement, you or an authorized representative work with the credit card companies to come to an agreement regarding your balance. In some cases, you can resolve your balances by paying less than what you currently owe. The prospect of reducing your principal balance is a huge appeal of credit settlements; however, there are serious consequences that can be realized by going this route.
Creditor Harassment
The most immediate consequence of a debt settlement is that you're likely to receive collection calls and letters from the credit card companies. Since credit settlement agencies ask you to stop making your monthly payments in order to save for a settlement, you'll incur the wrath of your creditors, who will bombard you with requests for payment. Of course, missing these payments helps your cause in qualifying for a settlement. If the credit card company thinks it can get your money without settling, it has no reason to agree to a settlement with you.
Credit Implications
Missing payments to prepare for the settlement also has a huge effect on your credit. Each late payment will be listed on your credit report, and if your accounts become more than 90 days past due, it sends a clear message to future creditors that you are a credit risk. Also, the accounts you settle will be reported as such; that is, your credit report will show that you failed to honor the original terms of your credit agreement, which is another huge red flag that can prevent you from obtaining credit in the future.
Fees
Credit settlement companies advertise that they can settle your debt for a percentage of what you currently owe. However, the reality is that what you currently owe may be far less than what you'll owe at the time of settlement. All of the late fees and over-the-limit fees you rack up during the settlement process will be your responsibility; you'll also owe fees to the settlement company you work with and you'll also owe taxes on the settlement amount. In the end, you might end up owing more than you owe now, even if you're able to settle.
No Guarantees
The biggest disadvantage of credit settlements is that there are no guarantees. Just because you fall way behind on your bills and just because a settlement company promises you the world doesn't mean the credit card companies will agree to settle with you. In fact, not only can your credit card company refuse to settle, but they can also sue you for late payments. There's a very real chance that you could come out of the settlement process far worse than you were when you initially considered settling.
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