Can they really reduce your debts?
Those Debt Reduction Ads
by Gary Foreman
Budgeting Debt Repayment
Get Out of Debt in 3 Steps
Who to Contact to Work Out a Debt Repayment Plan
I heard an advertisement on the radio about calling a toll free number to talk about cutting credit card debt in half. Is there a possible way to have one-half of a $5,500 credit card debt forgiven?
Most of us have heard them. Ads encouraging us to call them and have our debt reduced. And, most of us have wondered if it can possibly be true. Let's take a look at those ads.
Typically there are two types of firms that have similar ads. Credit counseling agencies and debt settlement firms.
A credit counselor will contact your credit card companies and work out a payment plan for you. Typically they'll get a lower interest rate for you and penalty fees will be stopped. But the amount owed will not be reduced.
The lower interest rate and elimination of penalties can significantly reduce the amount it will cost you to repay the debt. Sometimes ads will make it sound as if they're reducing the amount owed, but a closer listen will show that's not the promise. They're just promising that you'll pay less.
Debt settlement is different. There you come to an agreement with your creditor on a reduced balance. Generally that reduced balance is paid at the time of the agreement and will be regarded as payment in full.
Debt settlement is usually offered to hardship cases or to people that the credit card company doesn't expect to be able to repay their debts. Often the borrower is already late in making payments. Creditors are not obligated to negotiate a settlement, so there's no guarantee that you'll get one.
Debt settlement companies will want to be paid for their efforts. Typically they'll charge a percentage of the amount owed or the amount that they negotiate away.
Not all are honest. If they suggest that you stop paying the credit card company and make payments to them instead, that's a flashing warning sign. Tread very carefully.
You can negotiate with the credit card company yourself. You do not need a firm to do it for you. It will require some research and effort on your part to work through the process.
Your credit score may be affected. Asking about debt settlement won't ding your score. However, if you're successful in negotiating a settlement that will lower your score by around 100 points, according to a GAO study. Those with a higher score lost more points. If your FICO score was lower, you took a smaller hit.
The negative information on the settlement will remain on your report for seven years. But the effect will be gradually reduced if you make all your other future payments on time.
So what should you do? You don't say whether you're behind in your payments so we'll assume you are not. We'll assume you're just having a bit of a struggle to keep up with them.
If that's the case, you probably should forget the ads. Even if you had the money for a debt settlement, the hit to your credit score would be significant. And credit counseling is typically for people with a balance of $10,000 or more.
A better plan would be to contact your lender and ask for a lower interest rate. If you've been good about making your payments, they may accommodate you.
After you've made the transfer, don't just pay the new minimum. Continue to pay your old, higher minimum. You'll end up reducing the amount of interest you pay. In effect, you're doing much of what a credit counselor could do.
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.
Take the Next Step
- Take The Dollar Stretcher's free Get Out of Debt course and begin the journey to financial freedom!
- Stop struggling to get ahead financially. Subscribe to our free weekly Surviving Tough Times newsletter aimed at helping you 'live better...for less'. Each issue features great ways to help you stretch your dollars and make the most of your resources. Subscribers get a copy of Are You Heading for Debt Trouble? A Simple Checklist And What You Can Do About It for FREE!
Share your thoughts about this article with the editor.
I often wonder if I should be seeking professional help to get my debt under control! Tell us: Yes, I'd like to find out if I am a good candidate for credit counseling or No, I don't think I need couseling but I would like to find out how I can pay off my credit cards more quickly.
More Debt Tips & Tools
- 6 smart strategies for paying off your credit cards
- 5 great second jobs to bring in extra cash
- Pay down debt now or save: Here's how to choose
- Can I get a debt consolidation loan with bad credit?
- I stopped going to college but they want me to keep paying my student loan
- Cutting the burn during tough times
- Digging your way out of a financial hole
- This week's Readers' Tips
- Reduce your debt with this free debt course by The Dollar Stretcher
- Am I a good candidate for credit counseling?
- Do I have a debt problem?
- Reduce your debt payoff time
- Calculate the real cost of your debt
- Reduce credit card debt calculator
- Debt pay-down calculator
- Calculate the true cost of paying just the minimum