An astounding 15 percent of Americans believe they will be making payments on their credit cards until the day they die. On top of that, one-third of Americans believe it will take up to 20 years to pay off their current debts. Because of the overwhelming amount of debt most people living in the United States carry, many people find themselves wondering when debt settlement might be a viable option.
Dangers of Debt Settlement
While finding a way to settle your debt may be tempting, it isn’t always the best way to handle your finances. Essentially, a debt settlement company will negotiate a payoff amount for your account. You will no longer pay the creditor and, instead, will begin making payments to the settlement company. However, the process of working with these companies can actually hurt you.
During the process of working with the debt settlement group, you will have to cease making payments on your debt. These companies also don’t typically don’t start working with people until their debts have been past due for months. This means that your credit score will likely tank.
It also isn’t as good for your credit score as paying the account off in full. Normally, when an account is settled, it will be noted on your report as “Paid-Settled,” which is good. It doesn’t have as good an impact on your credit as a “Paid in Full” status though.
Additionally, using a debt settlement group can also make you feel like not paying your debts is okay. You aren’t really learning much about changing your habits to improve your long-term financial health.
When is Debt Settlement a Good Idea?
That’s not to say that debt settlement isn’t a good idea for some people. It is a necessary evil in some cases to avoid filing for bankruptcy or going into more debt with neverending interest being tacked onto your accounts.
Instead of settling, you may want to consider getting debt counseling. Contacting someone who is an expert in dealing with debt can help you see a way out of your mess. Sometimes being in debt makes it difficult to see a way out. A counselor can help you come up with a debt management plan and assist you in coming up with a doable plan.
If debt counseling isn’t for you, consider opening up communication with your creditors. Talking to them about your options may open another door for you. Many creditors will allow you a few months off of making payments for hardship. Give them a call and see what you can do.
And, if all else fails, debt settlement can be a good choice. I personally settled a debt with a third-party company recently. It helped me knock that off my credit and received a letter that it was paid in full. It helped my credit score tremendously and put a fire under me to get it paid off. If you’re already behind (like I was) it can be a good option.
Readers, have you ever settled a debt? What was your experience?
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Amanda Blankenship is the Director of Social Media for District Media. In addition to her duties handling everything social media, she frequently writes for a handful of blogs and loves to share her own personal finance story with others. When she isn’t typing away at her desk, she enjoys spending time with her daughter, husband, and dog. During her free time, you’re likely to find her with her nose in a book, hiking, or playing RPG video games.