I received the following excellent question from a Twitter follower yesterday. You can follow me on Twitter at @johnulzheimer.
“John, I have about $8,000 in credit card debt and a company called me telling me that they can help me settle that debt for about $6,000. It sounds pretty good but I’m suspicious. Does that sound legit? Will it help my credit scores once I’m out of the debt?”
Well, your question actually should be, “Will settlement hurt my credit…not help my credit.” The short answer is this…if you want to settle a debt then you can do so on your own or use SmartCredit.com’s settlement tool.
Debt settlement companies are for profit and charge consumers huge fees to negotiate payment plans with lenders, which are usually negotiated for less than what is owed. Consumers make payments to these companies then they in turn pay the lenders once they’ve accumulated enough money to make a settlement offer.
You might want to consider credit counseling instead. If you are in credit counseling, but are not undergoing debt settlement and have made no change to any of your payments or no contact has been made to the lenders, there is no impact on your credit. If the debt settlement company renegotiated your balance to a lower amount the lender will likely report this on your credit report. And yes, debt settlements are considered negative.
There is nothing a debt settlement company can do for you that you can’t do for yourself, for free. And, here’s what the debt settlement company probably didn’t tell you…you can be sued by your credit card issuer for not paying them while you’re paying the debt settlement company to accumulate your “war chest” with which they’ll use to make settlement offers…eventually.
If your credit card bills are paid on time and then all of a sudden you stop paying them and eventually settle the debt then, depending on the rest of your credit report, it could kill your scores. If you’ve got other unrelated negative items then the impact probably won’t be so severe.
Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, founder of www.creditexpertwitness.com and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. You can follow John on Twitter here.