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I’m disabled and I have $10,000 in card debt. Should I consider debt settlement?

Your creditors’ hardship programs may be a better option for your payoff timeline and your credit score – here’s why

Summary

Debt settlement can ruin your credit, and the firms that offer it often fail to deliver on their promises. If you’re disabled and it’s preventing you from paying down your credit card balances, you may consider contacting your creditors about their hardship programs instead.

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Dear Keeping Score,

I’m a disabled college student with some high credit card debt across six cards and I just can’t pay them down even though I pay a little more than minimum.

Is there anything I can do in my situation? My debt is about $10,000 between all the cards like Citi, Capital One, Chase and Overstock. Is it smart to use a debt relief service? I started it but backed out last minute because it didn’t seem right to just stop paying them to have better terms negotiated.

Can I use my disabled status to get interest lowered or stop it? Sorry for all the questions, but I’m lost on how to solve this. Any information would be appreciated very much. – Riko

Dear Riko,

I am sorry to hear of your troubles, but am encouraged by your action of backing out of a debt relief (I call them debt settlement companies) service.

Check out all the answers from our credit card experts.

Ask Steve a question.

Debt settlement companies are by nature adversarial with creditors. They often fail to deliver promises while landing you in a pickle with your creditors and ruining your credit score. Once you stop paying on your credit cards, your creditors will begin to mark you delinquent, increase your interest rates and add penalties.

This will negatively impact your payment history (35 percent of your score) and the credit utilization factor (30 percent). I know you are feeling overwhelmed right now, but like you, I don’t think it is right to just stop paying one’s bills to get a better deal. Certainly, most of us wouldn’t like it if someone did that to us.

Many debt settlement services are for-profit entities that may not have your best interests at heart when they sign you up. Companies that offer to settle your debt for much less than you owe very often are not able to deliver on the promises they make, but they will charge you nonetheless. And to add insult to injury, you may face legal collection action and your credit score is guaranteed to take a beating.

See related:  Should I get a new credit card for medical emergencies?

Stop adding to your card balances, and create a spending plan

Now, let’s talk about your situation.

First and foremost, stop spending on these cards! Interest accumulates on all balances from the second of purchase if you are carrying over a monthly balance. Adopting a “cash only” purchase mantra will help you not only stop adding to a ridiculously high balance at a ridiculously high interest rate, but also will help you understand and control your spending going forward.

Next, I want you to put together a spending plan that accounts for all your income and expenses. Having a plan for your spending will keep you from continuing to overspend and give you a firm foundation in the years to come.

See related:  Will paying down my credit card balance reduce my minimum payment?

Look into your creditors’ hardship programs

Two things you tell me jump out as encouraging signs for what could be a great solution for you, believe it or not. No. 1 – you apparently still have the ability to make minimum payments. This is a real plus. No. 2 – your disability may allow you to access the hardship programs that nearly every creditor offers (certainly all of the big guys). These programs are not highly advertised, so you will have to ask. But they were designed for people just like you.

Creditors created these internal hardship programs in large part as a component of their corporate social responsibility policy, but also so they can retain your business and not have you go the debt settlement or bankruptcy route. This means you will need to call your creditors, one by one, and talk to their hardship departments. I know these will not be easy calls to make, but your creditors know that as well.

I must caution against being discouraged if it takes more than one call to get to the right person. The first person you talk with may not be able to help you, but if you explain a little bit using words like “disability” and “hardship” you should be able to get to a hardship specialist.

If not, ask to speak to their supervisor, who should be able to help you. If your disability is somehow connected to why you have accumulated balances or can’t make larger payments on your accounts, be sure to let them know.

Remember that the person you are speaking with knows people just like you and will want to help if you convince them you are sincere in wanting to repay what you owe, but genuinely can’t. If you feel you need help to deal with your creditors, I recommend nonprofit credit counseling organizations that are affiliated with the National Foundation for Credit Counseling.

See related:  Is bankruptcy an option when illness wrecks finances?

Lower interest rates can shorten your payoff timeline

Generally, on a hardship program your credit card accounts are closed. You won’t be able to add to your debt, but your interest rates are drastically reduced. There is even a chance that your accounts won’t be closed by all of your creditors, but that decision will be up to them individually.

However, since you were considering a debt relief service (which would probably involve settling the debt for less than you owe), you were already at the point of knowing you were no longer going to have access to your cards.

The real plus of taking advantage of the hardship programs is those minimums you are paying now will start to make a real dent in your debt. Late and over-the-limit fees are also usually waived, which is another good thing for your bottom line.

The interest rates on your credit cards are likely the main reason you are having trouble making a dent in your balances. Some hardship programs will lower the interest rate all the way down to zero, which is fantastic. I can’t promise you will get that, but even if your interest rate is 10 percent you can have that $10,000 paid off in 60 months with payments of about $213 a month.

I know five years sounds like a long time, and it is. But it’s not so far down the road that you can’t see the light at the end of the tunnel. Plus, as your financial situation improves, you can always put more money toward paying down your bills. Check out the payoff calculator here and see how just paying a little more each month would save you both time and money.

Working directly with your creditors is going to help you the most, because you will likely be paying back all that you owe. This is much better for your score, even though the closing of the accounts may inconvenience you a little.

Depending on where you stand in the utilization department, though, that action may not make much difference. If you are close to maxing out your cards, the damage to your credit score has already been done. And making your payments on time from here on out will slowly but surely increase your score over time. I have every confidence that you can do this, Riko.

Remember to keep track of your score!

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