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Debt Consolidation Facts

1. If you spend more than 50% of your credit limit every month, this indicates to the Credit Bureau that you do NOT have enough cash on hand to meet your monthly expenses. This will identify you as a high credit risk and will actually reduce your credit score by 60 - 70 points overnight (Fair Isaac).

2. If you miss 1 or 2 payments on your credit card debt, the issuing company will skyrocket your interest rate to a whopping 27% - 30%!

3. Out of a random sample of 3 million American consumers (included in Experian's National Score Index), 51% of them have at least 2 credit cards and 14% of them have 10 or more credit cards.

Debt settlement – the ultimate solution to all your financial problems?

To anyone who finds themselves deep in debt, debt settlement may look like a light at the end of a very dark tunnel. And while it is a great option for some, it’s not for everyone. Debt settlement has severe long-term consequences. It can destroy your credit rating and damage your finances for many years to come.

Before you embark on a debt settlement plan, consider all of your options.

How does debt settlement work?

It’s possible to do debt settlement on your own, but most people choose to go through a specialist company. The company will ask you to stop paying your bills and send the money to them, instead. They will put that money into an account for you. The longer you ignore the bills, the lower your credit score drops. When the score is sufficiently low, the company will negotiate with your creditors to reduce the amount you owe. The creditor will take one look at your credit score and agree. The debt settlement company will use the money that has accumulated in your account to pay off the new balance, and you’ll be debt-free.

Video: Debt Settlement

The benefits of debt settlement

The main benefit of debt settlement is that it reduces the total amount you owe. When you stop paying your bills, the creditors will start to worry that you will default on your debt. They will happily agree to reduce the amount you owe because otherwise, they may get nothing at all.

dangers of debt settlement

The other benefit of debt settlement is that it’s better than filing for bankruptcy. Bankruptcy will haunt you even longer than debt settlement, plus you may lose some of your possessions. If your only choices are bankruptcy or debt settlement, choose the latter.

Video: Debt Settlement versus Bankruptcy: Pros & Cons

The true costs of debt settlement

For debt settlement to work, your credit score has to drop dramatically. Afterwards, the negative information will stay on your credit report for seven years. It cannot be erased. You will have trouble borrowing money, anything from a basic store card to a mortgage. If you do get approved, it will cost you. People with low credit scores pay a much higher interest rate than those with a solid credit history. Your insurance application may be turned down. You may even miss out on your dream job. Everywhere you go, salesmen, lenders, even potential employers, will run a credit check. For seven years, debt settlement will stay on your record, even if you’re solvent.

Things to consider before choosing debt settlement

While it may not feel like it right now, your debt problems are not permanent. By choosing debt settlement, you may actually be extending them by several years. If you pay off the debt on your own, it will reflect positively on your credit history. It may even raise your credit score, if you can keep up with the monthly payments. You’ll feel better about it because you didn’t take the seemingly easy way out. The experience will help you to stick to a budget in the future.