Ask Jean

Ask Jean Tuesday: Seeing Beyond Settlement

Posted by Jean

I have credit card debt of $80,000 after helping to support a family member in need. In the past, I haven’t had problems paying the required monthly payments. However, a promised company bonus did not come through and credit card companies have doubled their interest rates and monthly requirements, making it difficult. I can pay each month, but money is really tight now. I want to pay these off, and wonder if I should just keep plugging along, or try a debt settlement arrangement. What do you advise? – Allison, Wisconsin

It’s hard to pass on helping a family member or friend in a time of need – but sometimes, it can have a major impact on your own life. That means making a choice about the type of changes you are willing (and able) to make in your life. Below, I’ve listed your three main options – and given you some insight into the pros and cons of each.

Cutting down. When you have debt like this that you need to repay, sometimes it’s possible to slow your spending and free up some additional money each month.  Now, that’s not to say it’s easy. Making lifestyle changes like this one can be a challenge – but you’ll save your credit score, and learn some new budgeting strategies that will stay with you and keep you out of debt in the future.  First, since you haven’t had problems making monthly payments in the past, you may be able to lower your interest rates. Call your credit card companies to ask – but only give them a small amount of information to work with, so it can’t be used to flag you as a risky customer. Then, look for places you can pinch your pennies – whether it’s using coupons you find in your newspaper or online, unplugging your appliances when you’re not using them, or adjusting your thermostat, you might find you have more money to work with once you make some small changes.

Credit Counseling. After cutting down and pinching every penny you can manage, you should visit a credit counseling agency. A good, reputable credit counselor – one who considers your specific situation before putting you into debt management, takes at least a half hour to meet with you initially, can help with all kinds of debts (not just credit cards), and charges less than $75 initially, and $50 monthly – will set you up with a debt management plan. They’ll try to get your creditors to cut you a break – but in exchange, you have to agree to stop using your credit cards or opening new lines of credit until it’s completely settled.

There’s no guarantee you’ll be eligible for credit counseling, but if you are, it is a better option to pursue than going straight to debt settlement. Credit counseling can hurt your credit score initially, yes, but in the long run, you’ll have less debt, make payments on time – both of which can boost your credit score over time.

Debt settlement. Debt settlement is a last resort – and in very few cases is it even a good option. Debt settlement works like this: the company you choose will tell you to stop paying your creditor, and send the money directly to them instead (which helps demonstrate to the creditor that you don’t have the money to pay them). After a few months, your settlement company will go to the creditor and say “I’m holding X dollars on behalf of your customer,” so the creditor can decide if they want the money badly enough to accept that money as a settlement.

There are some pros to using debt settlement companies to get back on track. Often, you can settle your debt to a fraction of what you actually owe. It can save you thousands in the long run, and for many, it’s the only way to get out from under a mountain of debt. However, there are plenty of cons to these programs. Debt settlement is automatically placed on your credit report – and it can be a big black mark if you plan on opening any new lines of credit. While your payments are held, you can incur late fees (which sometimes, depending on your creditor, allows them to raise your interest rates). Also, you have to be very careful when looking into debt settlement, because there are a lot of dishonest companies ready to take advantage of your situation. You should be wary of any company charging you a percentage of your current debt, one without a money-back guarantee, promises of debt settlement in only a couple of months, or companies that ask you to hold your own money instead of passing it to their FDIC-insured account.

My advice? If you can make the payments, don’t take the hit on your credit score that debt settlement will inevitably give you. Instead, try to cut your spending as much as possible to get through this, and if you really, truly can’t manage after that, see if you qualify for credit counseling. Hopefully, then, you won’t even need a Plan “C.”