It’s quite easy to obtain a new credit card and start using it. But paying back a balance consistently is much tougher. This is especially true when unexpected expenses can arise at any time, forcing diversion of money earmarked for bills to something else.
Data from the Federal Reserve Bank of New York and the Census Bureau shows that American households with debt have credit card balances averaging over $16,000. But with average interest rates around 19 percent, credit card debt can quickly become expensive-even spiraling out of control over time. Though it can be tempting to pay back only the minimum required amount to sidestep late fees, the debt will only keep growing over time. There’s a huge difference in keeping debt temporarily at bay and actually digging in to address it once and for all.
Consumers who find themselves in a similar situation may choose to pursue debt settlement. This strategy entails working with a company to settle on the debt for less than the existing principal amounts. The settlement can take the form of one lump sum or a series of payments.
Successfully executing debt settlement start to finish depends on adhering to a series of five strategies, outlined below.
Consumers should never enter into any agreements without doing their due diligence. While it is helpful to partner with a reputable debt settlement company, it doesn’t mean the debt is suddenly out of your hands. An initial evaluation allows consumers to touch base with a certified debt consultant, provide an honest look at their financial situation and decide if debt settlement is, in fact, a workable solution. In other words, it’s a solid start.
The ultimate goal and top benefit of debt settlement is that it can significantly reduce the amount owing. To achieve a ‘discount’ on the debt, negotiate with creditors – or have a negotiation expert working with a debt relief company do so.
Since creditors have a vested interest in recouping at least some of the outstanding debts, they may be amenable to bringing down the repayment cost on payment of a lump sum. While creditors are not obligated to make deals, more effective negotiations will heighten the chance they’ll agree to settle.
Now, saving up a lump sum can be a daunting task. After all, if it was easy, credit card debt would be a thing of the past. Debt settlement makes this process more gradual, so participants won’t need to come up with thousands of dollars immediately.
As the Federal Trade Commission writes, “Debt settlement companies usually ask that you transfer [a specific amount] every month into an escrow-like account to accumulate enough savings to pay off a settlement that is reached eventually.” This process may be ongoing for 36 months or more, depending on the level of debt and how much participants can contribute per month toward the eventual lump sum.
Consumers should ensure these accounts are FDIC insured and they are able to retain control, check in and track their progress over time. Transparency is a must-have during debt resolution and is a major factor to consider when vetting companies.
Settlement occurs when negotiators and creditors are able to work out a deal. Creditors receive a lump sum payment, while debtors typically end up paying less than the original debt. For outstanding debts on multiple credit cards, the settlement process must happen for each individual balance. Consumers should stay in the loop and retain the power to authorize each settlement, so they stay apprised on where they stand.
After finally settling up, creditors then report the updated account status to credit ratings bureaus.
Debt settlement can be a path to resolution – but it depends on perseverance, working with the right partner and taking an active role in the journey.