experts warn of the risks of debt settlement offers

INDIANAPOLIS – The current climate of inflation and high prices is apparently pushing Americans to rely more often on credit cards.

According to Lending Tree, Americans had a total credit card balance of $887 billion in the second quarter of 2022. That was a jump of $46 billion from the first quarter of the year.

“National statistics show that credit card debt is starting to rise,” said Andy Mattingly, chief operating officer of Forum Credit Union.

During the COVID-19 pandemic, Mattingly says credit card debt has declined as many Americans have found help from government relief funding programs. Now credit card balances are back to 2019 levels.

“People come in and say ‘Oh my God, I can’t believe where my balance is’ and ‘I have to find a way out of this,'” Mattingly said.

Faced with growing balances and low monthly payments, many people are turning to different strategies to get out of debt. In addition to budgeting and cutting expenses, credit consolidation and counseling are offered by a number of financial institutions and non-profits and are generally seen as effective ways to deal with high balances.

However, Mattingly says you should be careful before accepting offers from debt “settlement” companies.

“A lot of debt settlement companies will talk and use the term consolidation, which financial institutions use,” Mattingly said. “But as you start to look, they’re like, ‘We’re going to get settlements for you.’ And that’s the key phrase that I think you really want to pay attention to when you start seeing this.

Here is a typical example of an offer from a debt settlement company:

Let’s say you owe $20,000 in credit card debt. A debt settlement company may offer to work with your lenders and negotiate the total up to $12,000.

“They’re trying to reduce some of that debt and they’re going to tell you to stop paying your creditors because we want to find a settlement,” Mattingly described. “Well, you start racking up late fees and your credit score can start to get hurt because it can take them 90-120 days to fix it.”

After the company negotiates a settlement of $12,000, you will need to repay that amount to the settlement company. However, the company could also charge you a 25% fee, adding another $3,000 you owe. Although it looks like you’ve saved $5,000 on your debt, the costs don’t end there.

Credit card lenders are likely to “charge” the $8,000 taken out of the initial $20,000 as a bad or irrecoverable loan. And that counts against you.

“If these financial institutions cancel some of these loans, it will remain in your credit for seven years,” Mattingly warned.

What could be a 100 point impact on your credit score could cost you dearly later.

“Let’s say you need a new car,” Mattingly said. “Maybe you could qualify for, say, 5%. But now your credit score is so bad that you now have to pay 12% or 13% for that car loan.

“Depending on the type of car, you might now be paying $100 more per month for a car loan than you could have gotten cheaper,” he continued.

It is important to know that credit settlement companies cannot guarantee the type of settlement they will be able to reach with your lender. If you decide to search for a debt settlement company, you can search for them by name on the websites of Better Business Bureau, Attorney Generaland agencies like Consumer Financial Protection Bureau.

If budgeting and cutting costs aren’t enough to get rid of your credit card balances, Mattingly recommends considering credit consolidation, counseling, and credit management as safer options. You may also be able to transfer your credit card balance to another card offering 0% interest during an introductory period. The key to this strategy would be to pay off the balance within an interest-free window.

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