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Wednesday, April 23rd 2014

CREDIT CARD HELP: The basic fundamentals of credit cards

Preventing and handling credit card debt

8 myths about settling credit card debt

By Sally Herigstad

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"Eliminate 70 percent of your debt in 24 hours!" "Get rid of your credit card balances without bankruptcy -- guaranteed!"

In times of near-double-digit unemployment and rising credit card delinquencies and defaults, the promises you hear in debt settlement ads sound appealing. Perhaps you know someone who has settled their debts for pennies on the dollar. If they can do it, why not you?

But is settling your credit card debts for less than you owe really that easy? Can anyone do it? And what are the consequences? Before you decide to try debt settlement, make sure you know the difference between common myths -- and the truth:

Myth No. 1: Anyone can get their credit card balance cut in half.
The truth: So many people are trying to get their balances reduced, according to Ken Clark, certified financial planner and author of "The Complete Idiot's Guide to Getting Out of Debt," that "you call and try to negotiate a credit card balance, and it's 'Get in line.'" The card company's attitude may be, "Yeah, you and everybody else," says Clark.

You must have a reason that you should have your debt reduced. "Debt settlement is specifically for hardship situations, like temporary loss of job, divorce, medical problems," says Wesley K. Young, legislative director, American Fair Credit Council (AFCC), a group that promotes best practices for debt settlement firms and lobbies for strong regulation of the industry. "If the individual is making enough money to pay back their debt, they need to pay back their debt." They have to be in a position where they cannot afford to make their payments.

And it should go without saying that you can't repeatedly settle your debts for less than you owe.

Myth No. 2: I have to pay someone to help me settle my credit card debt.
The truth: "I proved that myth is not true," says Kenny Golde, author of "The Do-It-Yourself Bailout." Golde is a filmmaker whose partner became ill and passed away while they were making a movie. By the time the film was completed and it became apparent the film wasn't selling in a timely manner, Golde was $250,000 in debt. He consulted with a bankruptcy attorney, who told him about debt settlements.

Golde had heard a lot of debt settlement companies are scams. He figured no one would work as hard on his behalf as he was prepared to. Besides, he says, "Here was a challenge, and I wanted to move forward and meet that challenge." Golde successfully negotiated his debts and saved more than $100,000.

In fact, you may do better talking to your creditors yourself. Clark has seen a number of credit card companies who are refusing to deal with debt negotiation firms. "They're saying they'd rather work directly with their customers instead of introducing a middleman who is going to stop the flow of payments and suck money out of the pile."

Still, many people would rather pay someone than do it themselves. Clark says, "It comes back to hand-holding. There's a huge fear of conflict. It's like the kid who broke the window and doesn't want to go in and face Mom and Dad. We're afraid to face these companies."

Myth No. 3: All debt settlement companies are the same.
The truth: Debt settlement companies range from reputable companies to dangerous fly-by-nights, and everything in between. They couldn't be more different!

Perhaps the biggest difference among debt settlement companies is whether they let you control your money or not. Some companies tell you to stop making payments to your creditors and instead send your money to them for several months. The idea is that you will then be behind in your payments, making creditors more anxious to deal with you. The settlement company keeps your money in an account and uses it to negotiate lump sum settlements with your creditors.

Credit card videos

For more on this topic, check out this video:
Video: The basics of debt settlement

You won't be asked to do that if you choose a TASC member. They never handle, manage, or otherwise control their client's funds, to avoid even the appearance of impropriety.

Myth No. 4: The money I send to the debt settlement company is safe.
The truth: Money in a debt settlement company's account is not FDIC insured. It's not a bank.

Many trusting people do what the settlement companies tell them -- they quit making monthly payments and instead send their money to the debt settlement company. In the worst cases, the company goes under or absconds with the money. At best, "They probably won't pay you interest on the money they're holding," says Clark. "You're taking a big risk. They could mismanage your money or make an offer that is not in your best interest."

There goes your money and your credit score, and you have nothing to show for it.

Myth No. 5: Debt settlement won't hurt my credit score.
The truth: Debt settlement can hurt your credit score almost as much as bankruptcy would.

Asking for a settlement on your own won't hurt your credit score. Succeeding in getting a settlement, or skipping payments as some settlement companies advise, definitely will.

"Your credit score won't be damaged when you try to settle your credit card debts," says R. Glen Ayers, attorney and ex-bankruptcy judge. "Your credit score will be damaged by the defaults on your accounts or by contacts from the credit card companies when you settle."

Myth No. 6: Using a debt settlement company won't cost much.
The truth: It will cost more than you think by the time you finish paying the settlement company and you pay a higher cost for credit in the future.

"You're going to pay $1,000 per year for an account maintenance fee," says Clark. You may pay a percentage fee on top of that. And if you end up owing the settlement company, you will pay interest to them, as well.

In addition, you'll pay more for credit after you settle your debts. "They're going to tank your credit score," says Clark. The lower your score, the higher the interest rates lenders will charge you. "That lower score is going to cost you a lot over the next five to seven years."

Finally, the amount of debt that is forgiven by a lender is often taxable.

Myth No. 7: Debt settlement or bankruptcy are my only options when I can't make my credit card payments.
The truth: You always have options. For example, if you lose your job and you call your credit card company, they may give you "forbearance" -- in other words, they may allow you to make smaller payments or no payments at all for a time (you'll still be charged interest, however).

If it's time to get your finances under control, a nonprofit credit counseling organization can help you look at the big picture and see all your options, from downsizing to increasing your income or managing your budget.

Myth No. 8: When the negotiations are done, I'll be out of debt.
The truth: You may have a new creditor if you used a debt settlement company's services. If the contract you signed says they keep a 10 percent fee, for example, Clark says some companies use all the money you send them to negotiate a deal. Then you start owing them a balance and getting a bill. Great -- you've just picked up a new creditor.

See related: The 1099-C surprise: Debt forgiven by a lender is often taxable, Forbearance offers credit card debt reprieve, Video: The basics of debt settlement, How debt settlement works and how it impacts credit scores, Credit card debt negotiation in 3 not-so-easy steps, With credit card bills, don't be late -- negotiate

CREDIT CARD HELP: The basic fundamentals of credit cards

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