- Personal Finance
WARNING: Don't Settle That Credit Card Debt Just Yet! 4 Things You Need To Know Before Settling That Balance!
In 2009, American consumers have over 850 BILLION dollars of credit card debt. The number would be a bit less in 2010, but there are constantly ads on TV that advertise that they can settle your credit card debt for only dimes on the dollar, reduce your debt by 50% especially if you have 10000 or more in credit card debt, and so on.
You may think that's a good deal... You don't have to do anything, except make a phone call, and you can pay a lot less in debt.
Here are a few things they won't tell you about their services...
You Can't Negotiate UNTIL You are Delinquent
What most people don't realize about debt settlement is you can't just call up a credit card company and say "I know I owe you 10000 but I only want to pay you 5000 and call it even." it doesn't work like that.
Instead, you have to stop paying for several months, ruin your credit first, THEN negotiate with the credit card company, and see how much it is willing to 'discount' the debt.
Some debt settlement companies offer to do all that for you... They will take your money (i.e. "Send us the payment instead"), ruin your credit for you, THEN negotiate on your behalf. Is that worth the time and the hit on your credit score?
Your Credit Score is Ruined
Any sort of "settlement" will be reported as a negative on your credit score, to the same extent as if the balanced was zero-ed due to "charge-off" (the credit card company didn't bother to collect any more) or "bankruptcy".
Furthermore, any of the delinquent payment history will remain in your credit file. Settling your debt won't erase that.
Finally, if you settled your debt recently your credit score can actually go even FURTHER DOWN, esp. if the charge-off occurred a while back. This is because the settlement 'event' is more recent, and recent events are worse on your score than events in the more distant past.
If you settled more than one credit card's debt you will have MULTIPLE RECENT NEGATIVES which will mean MAJOR hit on your credit score, almost as bad as having declared bankruptcy.
Your Credit Score Has Wider Effect
You may think that credit report and credit score is just between you and a credit card company, but that is quite far from the truth.
If you rent, your landlord can get a credit report on you.
If you work, your employer can get a credit report on you.
Thus, having a bad credit score can prevent you from renting, or even affect your employment application or subsequent promotions.
Not to mention you will have problems applying for any sort of credit, from store credit cards to car loans and even account for a cell phone.
Forgiveness of Debt Is Income
Even if you managed to survive the drop in credit score, there's one more item you need to be aware of... Taxes.
According to IRS, forgiveness of debt over $600 is considered income, and thus, you have to pay taxes on it!
If you owe $10000, and settled the debt for $5000, the forgiven amount, $5000, is considered income by the IRS, and thus, you have to pay taxes on it!
You may have settled the debt for a bit less, but did you budget for the taxes that you have to pay?
Before you settle your credit card debt, beware of the effects that settlement can have on you. The hit on your credit score precedes the settlement. The hit on your credit score is almost as bad as bankruptcy. The secondary effects on your credit hit is actually quite prevalent. And finally, you have to pay taxes on the amount forgiven.
If there are ways to solve the problem, such as credit counseling, use that first. Save debt settlement and bankruptcy as last resort.
Real Advice on Debt Settlement
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