Most of us need credit to get by. Unless you are born into a family with immense wealth, you probably can’t buy a house or a car without credit.
But it’s also quite easy to get into credit trouble and find yourself deeper in debt than you ever imagined.
A debt settlement company may sound like a good way to help clear credit problems. Here’s the pitch: The company contacts your creditors and negotiates a lower balance for you — usually pennies on the dollar.
If this sounds like a fairy tale, it probably is, says JJ Montanaro, a CERTIFIED FINANCIAL PLANNER™ professional at USAA.
Here are some major problems with debt settlement companies, according to Montanaro:
- Your creditors aren’t required to deal with them.
- The companies frequently give out bad advice. They may tell you to stop making payments while they’re negotiating or to stop communicating with your creditors.
- While waiting for a settlement, you can accumulate late fees and further damage your credit history.
Here’s what you may want to do instead:
- When you realize you’re in trouble, do not panic. Talk with a nonprofit credit counselor or a financial professional to see what options are available.
- Talk with your creditors and try to reduce interest rates or work out a payment plan.
- Check out a debt consolidation or personal loan with a lower interest rate. But watch your spending, or you may find yourself even deeper in debt.
- Work to pay off the highest interest accounts first. In the long run, this will serve you best.
- If bad spending habits got you into trouble in the first place, change them.
- Make sure you have a budget, and cut back on optional expenses.
“Unfortunately, there’s no painless silver bullet that will allow most people to get out of debt without hard work and discipline,” Montanaro says. “It’s like quicksand — easy to get into but harder to get out.”
USAA’s Debt Manager makes it simple for you to develop a debt relief plan that saves you time and money and shows your progress during your program.