Eight Common Misconceptions About Settling Credit Card Debt

Post by Sharat on April 24, 2009 · Under Australian Economy, Featured Articles, Hints and Tips, Personal Finance, Self Help, banking, credit cards, interest rates, loans, personal loans · Comment 

During a recession or when times are hard. The promises held by debt settlement sound quite appealing. After all why shouldn’t one settle their debt for cents on the dollar?

Before trying to reach a settlement with a lender for less than is really owed, consumers should think about the consequences and not hold any misconceptions. Here are eight commonly held misconceptions borrowers should eliminate before negotiating a settlement

Misconception No. 1: Anyone Can Get Their Credit Card Balance Cut In Half.

In reality so many people are trying to reach settlements with their creditors, that lenders may not be too keen on the idea, and ultimately take the view that the borrower should “get in line”

Consumers should first have a reason for wanting to settle, loss of job, or divorce, simply wanting to reduce the amount owed is not quite good enough, if individuals make enough money to pay their debt, then that is what they should be doing.

Misconception No. 2: Consumers Must Pay Someone To Help Settle Their Credit Card debt.

Some credit card issuers prefer dealing direct with the customer instead of a debt negotiation company. Preferring to work with the customer to achieve an outcome is common for lenders who feel that working through middlemen stops the flow of money from the customer, and sucks commissions from the funds available for paying off creditors.

Misconception No. 3: All Debt Settlement Companies Are The Same.

Debt settlement companies range the full spectrum in terms of types of firm. Companies can be extremely reputable or they can be dangerous cowboy outfits, and everything in between. The biggest difference between companies is whether they let the customer control their money or not.

Some companies advise their clients to stop making payments to their creditors and send money to them for several months. The basic premise that technique is that borrowers who are behind on their payments make creditors more anxious to reach a settlement. The settlement company keeps the money in escrow and will use it finally to negotiate a lump sum payment with creditors.

Misconception No. 4: The Money Sent To A Debt Settlement Company Is Safe.

If a debt settlement company is holding money in escrow, then it is not federally insured by the Commonwealth Government of Australia. Debt settlement companies are not banks and as such the Government does not treat them that way. If the company goes under or its owner absconds with the money, the customer will have lost their money, and in particular if the settlement company has withheld payment in order to negotiate a settlement, then the customer faces an adverse effect on their credit score with nothing to show for it.

Misconception No. 5: Debt Settlement Does Not Hurt Credit Scores.

Debt settlement hurts credit score in reality hurts credit scores almost as much as bankruptcy would. Borrowers asking for a settlement on their own won’t hurt their credit score. Succeeding in getting a settlement, or skipping payments as some settlement companies advise, definitely will.

Misconception No. 6: Using A Debt Settlement Company Doesn’t Cost Much.

In reality debt settlement companies end up costing far more than borrowers expect by the time they have finished with them. There is a flat fee for account maintenance, percentage fees may be charged over and above that, and if the borrower ends up owing the company then they will have to pay interest as well.

Beyond that, once the debt has been settled, consumers will end up having to pay more to borrow money as a direct result of their credit score deteriorating as a result.

Misconception No. 7: Debt settlement Or Bankruptcy Are The Only Options Available To Borrowers When They Cannot Make Credit Card Payments.

There are always options available to borrowers who cannot make their payments. Calling the card issuer and taking advantage of their forbearance program (having payments reduced or suspended for a short time) is always an option. Beyond that credit counselling from a non-profit, or asset sales, such as jewellery or second cars are options available to borrowers before they pull the trigger on settling or declaring bankruptcy.

Misconception No. 8: When The Negotiations Are Complete, The Borrower Is No Longer In Debt.

In reality the debt settlement company may become a new creditor if they use all the money sent by the borrower to negotiate and then pay a lump sum settlement. If that is the case they the borrower now starts owing the settlement company and will start receiving a new bill from a new creditor.

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