Credit card debt has become a significant burden for many Americans, with national balances exceeding $1 trillion for the first time in early 2023. Federal Reserve data indicates outstanding balances currently stand at $1.18 trillion.
Individual borrowers also face high balances. TransUnion reports average credit card debt per borrower is $6,580, while Experian data shows an average of $6,730. Given current high interest rates, paying down such debt can take years.
Some consumers encountering growing balances explore debt relief options promising lower monthly payments and faster debt elimination. However, understanding the risks before enrolling is crucial.
Debt relief or settlement companies typically negotiate with lenders on behalf of borrowers, focusing on unsecured debts like credit cards. They charge a fee based on a portion of the debt.
The Federal Trade Commission notes these companies often advise stopping regular monthly payments. During this period, they attempt to negotiate a settlement for less than the full amount owed. Clients deposit money into a savings account, which the company eventually uses to pay the lender, often as a lump sum.
Settlements require time, and not all issuers agree to negotiate. Consumers may face added interest, penalty APRs, and late fees during non-payment periods. Even successful settlements can result in higher overall balances from fees and negatively impact credit scores.
Key considerations include fees, which can reach 25% of the total debt. For an average $6,600 balance, service costs could be around $1,650. The settlement process may take years, with the FTC noting it could last several years, and company websites cite durations from 12 to 60 months.
Credit effects are significant. Stopping payments leads to missed payments on credit reports, potentially sending debt to collections. Tax obligations may arise on forgiven debt amounts, which could be considered taxable income.
Not all debt relief companies are legitimate. Scammers may charge large upfront fees without providing services. The FTC warns against operations that fail to help settle debts.
Upfront fees are a major red flag. The FTC prohibits companies selling services over the phone from misrepresenting themselves or charging fees before reducing debt.
The Consumer Financial Protection Bureau outlines criteria debt settlement companies should meet before charging fees: reaching a settlement on at least one debt, obtaining client agreement to new terms, and ensuring at least one payment is made under the renegotiated plan.
These guidelines help consumers avoid companies that cannot assist them, though added interest and fees may still accrue. They also aid in identifying potential scams.
Consumers should be wary of guarantees to eliminate all debt or promises of upfront settlement terms, as these are often unrealistic. Researching customer reviews and complaints is advised.
Before pursuing debt relief programs, alternatives exist. Direct negotiation with credit card issuers may yield reduced interest rates or settlement agreements.
Balance transfer credit cards offer 0% introductory APR periods, typically 12 to over 20 months, allowing debt consolidation and principal repayment. Transfer fees are usually 3% to 5% of the balance.
Personal loans for debt consolidation can streamline payments and potentially lower interest rates, though they may include origination fees or prepayment penalties.
Credit counseling provides cost-effective debt management plans and budgeting assistance. Nonprofit organizations like the National Foundation for Credit Counseling offer services that may lower monthly payments or interest rates without settling debts.