Credit Card & Debt Relief
- 7 min read
- Don't allow a smooth-talking con artist talk you into a debt relief scam.
- 5 pros and 5 cons of debt settlement
- 5 pros and 5 cons of credit counseling
5 Signs of a Credit Card Debt Relief Scam
Credit counseling and debt settlement are two popular strategies for finding credit card debt relief. Both are useful if your credit card debt is causing you to miss payments, or not pay other, higher-priority expenses. Many Bills.com readers ask how to find an effective debt relief partner and avoid a scam. Another popular set of questions ask for the pros and cons of these two credit card debt relief strategies. Read on to learn more about credit card debt relief.
Let’s start with five ways you can tell when con artist is trying to sell you a credit debt relief scam.
5 Signs of a Scam
The "Con" in "Con Artist" is a short for "confidence." A confidence scam requires the perpetrator to gain your trust so that you are willing or even eager to pay him or her to help you make or save a lot of money. Debt relief cons share one or more of these five elements:
|5 Signs a Debt Relief Company May Be a Scam|
|• Advance or undisclosed fees • Rushed to sign-up now • Promises sound too good to be true • Company has short history • Promise a better credit score|
Advance or Undisclosed Fees
Con artists will take one of two tactics with fees. The first is to convince you to pay up-front fees of hundreds of dollars for amazing services. The second is to dance around the cost of their services. Legitimate debt relief companies do not hide their fees. In the case of credit consolidation companies, their up-front fees are relatively low: $25 to $75. Monthly fees are relatively low, too. Legitimate debt settlement companies following federal rules charge no up-front fee at all, and disclose their fee schedules. Run away if a debt relief company demands a big fee, or avoids your questions about fees.
Rush You to Sign-up Now!
Legitimate debt relief companies do not have one-day sales or special limited-time price breaks — their prices today are their prices tomorrow. Look at it this way: It probably took you while to build up your credit card or other debt to where it is today. Today or tomorrow, your best debt relief strategy will not change. Choose the strategy based on your needs and not a desire to take advantage of someone’s low-low price.
Promises Sound Too Good to be True
Debt relief is similar to weight loss in that both take time and effort. In weight loss, we know no magic pills will help us shed pounds easily. Debt relief is the same way. Every strategy has positives and side effects. If a person says their magic plan has no side effects, alarm bells should go off in your head. We discuss the pros and cons of two popular debt relief plans below.
Company Has a Short History
Go online and find the company’s BBB listing to learn how long it has been in business. A long history does not mean that company’s strategy is right for your needs. A company with a long history means it has helped enough people to remain successful in a competitive business. No history or no BBB listing does not mean the company is a scam, but it is a red flag you should ask about. If the person you speak to dances around the subject or tries to distract you with another issue, listen to your alarm bells.
Get a no-cost, no obligation analysis of credit card debt relief choices from a pre-screened debt relief provider.
Promises to Fix or Improve Your Credit Score
One of the side-effects of debt relief is a damaged credit score. Forthright and honest credit counseling and debt settlement companies tell prospective customers their strategies cause a decrease in a client’s credit score. The amount a client’s score drops varies because credit scores are complicated equations based on many factors. The really bold scam artists promise debt relief and an improved credit score, which is just not possible.
Now let’s look more closely at two popular credit card debt relief strategies. Which is right for you depends on your needs.
Credit Counseling Credit Card Debt Relief
|Credit Counseling 5 Pros & Cons|
|Pro||• Repay entire balances due • No calls from creditors • Credit counseling session sets up household budget • May pay lower interest rate on enrolled debt • Available in all states|
|Con||• 5-year program length • High monthly cost (~3% of total debt) • Enrolled accounts usually closed • Credit score impact • Low completion rate|
Credit counseling is a two-part strategy. Part 1 is counseling. Counseling consists of an hour-long (or longer) meeting with you and a credit counselor. Both of you review your household income and expenses, and try to agree to a plan that allows you to repay your creditors over five years. Great credit counseling companies offer paper and online tools to help you create a budget and learn more about spending money wisely. See the Bills.com article Find the Best Debt Counseling to see a checklist for picking a debt relief partner.
Part 2 of credit counseling is the debt management plan. Here, the credit counselor approaches each enrolled credit card company and develops a payment plan to pay off each debt. In some instances, the credit card issuer will agree to a reduced interest rate, called a concession rate, but sometimes the concession rate is higher than the consumer’s existing rate. Not all credit cards need to be enrolled in a debt management plan, and an account with a high concession rate is one to not enroll.
Typical payment plans last for 5 years. A typical payment is about 3% of the total enrolled debt amount. These two facts account for the low success rate of debt management plans. Roughly one in four people enrolled in debt management plans make it the full 5 years.
Debt Settlement Credit Card Debt Relief
|Debt Settlement 5 Pros & Cons|
|Pro||• Short program length (24-36 months) • Low monthly payment • No up-front fees • Pay less than full balance • Settles many types of consumer debt|
|Con||• Possibility of lawsuit • Creditor calls & letters • Enrolled accounts usually closed • Credit score impact • Possible 1099-C issue|
Debt settlement, as a debt relief strategy, is new as an industry but is based on a legal concept that goes back hundreds of years. Here’s the idea behind debt settlement: Arissa borrows $50 from Sarah, and promises to repay the debt in a week. A week later, Arissa cannot repay all $50, but has $47 in hand. Arissa says to Sarah, "Here is all I have." Sarah says, "Oh, that’s fine. I’ll take that. We’re good." What Sarah and Arissa agreed to lawyers and judges call an accord and satisfaction, which is a time-honored way of settling debts.
In a debt settlement program, you stop making the monthly payments on your enrolled accounts. At the same time, you make monthly payments into a special bank account. As this account grows, a negotiator at the debt settlement company negotiates deals with creditors to resolve each account.
Debt settlement typically takes less time to complete than credit counseling. It usually costs less, too. The downsides are a potential for lawsuits by aggressive creditors who do not wish to settle for less than the full balance due. Also, some creditors will file a notice, called a 1099-C, with the IRS when a debt is settled that indicates how much debt was forgiven. However, this tax issue is usually handled by filing a Form 982. We discuss the tax issue in the Bills.com resource Cancelation of Debt Income.
At this point you may understand why some people fall for credit card debt relief scams. A quick, magical fix may sound like a good idea after looking at the pros and cons of debt settlement and credit counseling. Which strategy is right for you? That depends on your circumstances, goals, and how much you can afford to pay to resolve your debts. Give the Bills.com Debt Coach a try. This no-cost online tool helps you decide which debt relief plan is right for you. Simply enter your debts into Debt Coach, and select your goals and which factors matter to you. Debt Coach then shows you the costs of debt settlement, credit counseling, bankruptcy, and other debt relief strategies. But whatever you do, don’t fall for any quick-fixes.
If you are struggling with debt, you are not alone. According to the NY Federal Reserve total household debt as of Quarter Q4 2022 was $16.91 trillion. Student loan debt was $1.60 trillion and credit card debt was $0.99 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
Each state has its rate of delinquency and share of debts in collections. For example, in New York credit card delinquency rate was 3%, and the median credit card debt was $420.
Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.