Is Credit Card Debt Settlement the Right Answer for You?

Posted on | November 1, 2010 | No Comments

You may be up to your eyeballs in debt, wondering if you’ll ever see your way clear.  Have you thought about credit card debt settlement?  There are pros and cons, so before you jump into this option, take a minute to look at the details.  Consider these three points prior to committing yourself!

1. Is your credit dilemma short term or permanent?  If you’re experiencing a short term problem with your credit card balances, you might consider working directly with your credit card companies to request a reduction in monthly payment amounts and interest rates.  This might not have as strong an impact on your credit rating as a credit card debt settlement option where you request credit card debt forgiveness.  Each credit card company handles your situation differently.  Chase has an excellent Balance Liquidation Program – BLP – which offers the benefit of a lower Annual Percentage Rate – APR – and the waiver or applicable late and over – limit fees.  This program puts you on a level payment plan which will completely pay off the balance of your card.  (And close it too…)  One downside to this situation is that discussing your financial situation will most likely trigger a review of your credit situation by your credit card companies.  Although new laws may limit the adverse actions they might take against you, they may choose to not work with you, or cancel any credit line that is currently available to you.  When your credit limit is reduced it could have a negative impact caused by the reduction.  In addition, although you previously may have had a low debt to credit line ratio, a reduction may cause you to be at over 50% ratio of debt to credit line ratio, dropping your credit score.  (Bank of America and AT&T are both well known for this – ask them for assistance to lower your interest rate, they’ll most likely deny you, and then cancel your credit line!)




2. Are you unable to make payments due to a condition which will not change in the near future?  If you’ve experienced a life changing situation, such as divorce or being widowed, you may not be able to recover enough financially to make your former payments.  If you or the primary wage earner in your family have become disabled, working at your previous income level may no longer be a possibility.  Caring for ill or disabled family members may also create a problem for your income situation.  This situation warrants credit counseling.  It would be a good idea to review your financial situation completely and honestly with a non-profit credit counselor.
3. Will you need a good credit score for employment?  Keep a long range view on your situation.  You may be under stress at the moment, but take time to consider your future too.  If you’re looking for employment or seeking to improve your employment outlook, be aware that many employers take into consideration your credit score.  It may be well worth it to downsize your financial burden by living more simply now so that you can take advantage of opportunities that may be in your future.  If your credit score is reasonable and you have income, you might consider a personal loan to consolidate credit card debt, and erase credit card debt completely.

If you’ve decided to work with a credit card debt settlement company to eliminate unsecured credit card debt, look closely at the costs.  If you haven’t already made an appointment to speak with a non-profit credit counselor, take to time to do so prior to making this decision.  Consider that many credit card debt settlement companies charge hefty fees, which they collect from you prior to making any payments on your behalf.  In the meantime, you will continue to receive collection telephone calls from your creditors, and letters in the mail.  It’s a very difficult and stressful time to deal with credit problems, so try to remain calm and make decisions that are in your best interest.  Prior to signing up for this option, ask what your monthly payments will be, who they will be made to, and how much of that will be paid to your creditors.  One probable scenario will be that your monthly payments will go to the credit card settlement company for many months prior to the company making any negotiations on your behalf.  This will show up on your credit report as late, because your payments will be going to a 3rd party, not your credit card companies.

Whether you decide to work directly with your credit card companies, or hire a debt settlement company, or even work with an attorney, you should be prepared for the emotional toll this process will take.  Of course it would be easier for you if you could simply pay your bills with dignity, so try to remain dignified in the process.  Be aware of some of the pitfalls, and make your decisions wisely and calmly.  If you choose credit card debt settlement, go into the arrangement fully informed.  When you are settling credit card debt it is not the time to make an emotional decision with your finances.

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