Warning: Here’s what those debt settlement companies don’t tell you

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debt settlement companies warning
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If you’re considering working with debt settlement companies to make your debt go away, there’s a big warning you need to hear first!

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Debt settlement companies can leave you worse off than you already are

If you’re in debt up to your eyeballs, you may have seen ads on late-night TV promising to reduce your outstanding debt to just pennies on the dollar without making you file for bankruptcy — no matter how much outstanding debt you have.

But there’s more to their offer than meets the eye, says money expert Clark Howard.

“You usually pay an upfront fee to the debt-settlement firm, plus a monthly retainer,” Clark says. “Their strategy is to get you to stop paying on your bills and make the credit card companies so desperate that they’ll settle with you. The reality, however, is that you just wind up damaging your credit.”

Exactly how badly could you hurt your credit by working with debt settlement companies?

MyFICO.com lays out some possible scenarios for two hypothetical consumers. One customer starts with an average credit score and the other with a high credit score. But both encounter a number of financial difficulties along the way:

If your initial credit score is… 680 780
Here’s what it will be after maxing out a credit card… 650 to 670 735 to 755
Following a single 30-day late pay… 600 to 620 670 to 690
After settling a credit card debt… 615 to 635 655 to 675
Post bankruptcy filing… 530 to 550 540 to 560

As you can see, working with debt settlement companies is only slightly less harmful than filing for bankruptcy, which is the full nuclear option for your finances!

So what is Clark’s preferred alternative?

If you’re struggling with debt, Clark says you should get in touch with a local affiliate of the National Foundation for Credit Counseling at NFCC.org.

“They can advise you about budgeting, which will help about one in three people,” he notes. “Beyond simple budgeting, there are other techniques they may suggest based on your individual circumstances.”

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Read more about exactly what the NFCC can do for you when you’re financially hurting here.

More credit and debt stories from Clark.com

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