Have you seen any of those ads titled, “Get Out of Debt today,” “Get Out of Debt Fast, or “ Debt Relief Now!”?
Those ads probably seemed very inviting. I mean, who wouldn’t want to get out of debt fast?
These ads are promoting a debt consolidation option called debt negotiation or debt settlement. Yes, this can be a way out of debt, but it’s important to know what’s true about it and what isn’t. A lot of half truths and outright lies exist about debt negotiation, and here are five you need to be aware of before choosing it.
1. You can get credit card debts reduced just by asking
This would come under the category of total lie. No credit card company will agree to settle a debt just because you ask. You need to be having a serious financial emergency. What’s a serious financial emergency? It could be that you just went through a divorce and got stuck with all the debts, had an expensive hospital stay, or lost your job. You may be asked to document that emergency, so be prepared with the appropriate paperwork. The thing is credit card companies just don’t want to settle unless there’s a good reason, which would be that serious financial emergency.
2. Debt settlement will not damage my credit score
Here’s another one in the category of outright lies. Debt settlement will definitely damage your credit score – maybe by as many as 80 points. It will also have a long-term effect as those settlements will stay in your credit reports for seven years. Lenders will see you settled your debts instead of paying them off in full and will be less likely to offer you credit. Also, credit will cost you more because you’ll be charged higher interest rates.
3. You have to use a debt settlement company
We would call this one a half truth. Nothing says you have to use a debt settlement company. You could settle your debts yourself. But most people choose not to. Two big reasons for this exist. First, using a debt settlement company eliminates the need to save up enough cash to make the lump sum payments required to settle debts. Second, negotiating with credit card companies is tough and takes a lot of time. It’s just much simpler and easier to let a professional debt settlement company handle the negotiations for you. Plus, it’s almost certain a professional settlement company will negotiate better settlements then you could yourself.
4. It doesn’t cost much to use a debt settlement company
This one falls in kind of a gray area. It’s not a total lie nor is it the total truth. Reputable debt settlement companies usully charge a percentage of the amount of debt being settled. This typically ranges from 15% to 25%. If you owe, say $30,000, you’ll probably be charged the full 25%. This mean yes, it will cost a lot to use a debt settlement company. But suppose you owe $15,000 and are charged the 15%. This would cost you $2250. If the company were to get that debt cut down to $7500, you’d save a total of $5250, so it isn’t really costing a lot to use a debt settlement company.
5. If I don’t settle a debt, it will stay in my credit report forever
We rate this one a half truth. That’s because debts that were settled will stay in your credit reports for seven years but not forever. They will also grow less critical as time goes by. If you did have that $15,000 in debt settled, it would definitely be a black mark for the first several years afterwards. Lenders would see you had settled your debts instead of paying them off in full and would be less likely to give you credit. When you did get new credit it would cost you more in the form of higher interest rates. Four or five years after your settlements they would have less of an impact, especially if you had stayed current on your debts and had not missed any payments during that time.
6. Debt negotiation will get me completely out of debt
We will rate this one a half truth because debt negotiation may get you completely out of debt. The problem is it might not. Unfortunately, some debts just can’t be negotiated. This includes student loan debts, automobile loans, mortgages, and other secured debts. And some lenders simply won’t settle regardless.
Debt negotiation can definitely be a path out of debt. However, before you sign up with a debt settlement company, it’s important to consider the half-truths and total lies you’ve just read. You should now be in position to make an informed choice as to whether this is for you or you need to find another way to deal with your debts.