The main reason to have good credit is so that you can get lower interest rates that you wouldn't be able to get otherwise. It's interesting that some people don't realise this when they're trying to figure out the best way to deal with their debt. The main reason for this is that a lot of people look at their credit based on how they feel about it instead of how it works. That is, they think their credit score is more than it is—more than just ONE tool that lenders use to decide if giving you a loan will make them money—and it becomes a matter of pride instead of their financial health. In the end, making the mistake of thinking about credit on an emotional level instead of a logical one can cost a person with a lot of credit card debt and only enough money to make minimum payments thousands of dollars in interest charges and even more in years of stress over money.
Another part of the problem is that most people don't know what makes up their credit score, even when they try to think about it logically. Your credit history and the amount you owe are the two biggest parts of your credit score. Both of these are affected by debt settlement, but one in a bad way (your credit history) and one in a good way (the amount you owe) (the amount you owe). Even though your credit history is slightly more important than how much you owe when figuring out your score, the difference (5%) is usually not enough to make up for the money you save by enrolling in a settlement programme for your credit card debt. The less your credit score should matter if you join a debt settlement programme based on how much money you can save by doing so. Why? Because any higher interest rates you might have to pay in the future because of the effect on your credit will rarely be more than the money you saved by paying off your credit card debt. So, in the end, who benefits the most from a settlement programme? 1) People who owe a lot; 2) People who can only pay the minimums; 3) People who are paying high interest; and 4) All of the above. Consider the following examples to show what I mean.
Let's say that you have credit card debt of $30,000. The average annual percentage rate on these cards is 19%, and you can only make the minimum payment each month, which comes to $750 in your case. If this were to happen, it would take you about 12 years and $108,000 to get out of debt. Under a debt settlement programme, on the other hand, it would take about 3 years and $16,500 to pay off all of your debt. That's $91,500 more than if you had just made the minimum payments. Most of the time, your higher interest rates after debt settlement won't make up for the money you saved. This is especially true when you consider that you can always refinance your loans once you've built up enough equity.
In our business, one of the most frustrating things to see is a customer who owes a lot and can only pay the minimums, but is still unwilling to give up even a little bit of their credit to get out of debt and save money. I just helped a customer from the South Side of Chicago who owed $40,000 in credit card debt. His interest rates were 29%, and he could only make the minimum payments, which in his case added up to $1700. When he tried to convince the creditors to lower the rates, they just told him that his credit report showed he had too much debt, so they had to charge him a higher interest rate. Even though his credit score was in the high 600s, he was turned down for a home equity loan for the same reason. But he laughed when I told him that our debt settlement programme might hurt his credit. There was no way he could ever do something bad to his credit. At the end of our conversation, I tried to refer him to our affiliate credit counselling company, but he wasn't interested because joining a debt management plan would hurt his credit. His choice to keep making the minimum payments will cost him more than $20,000 a year and may prevent his young children from going to a four-year college, if not more.
By not being reasonable and realistic about how debt settlement would affect his credit, this person made his financial situation much worse. He didn't think of his credit score as a way to save money by getting lower interest rates on loans. Instead, he thought of it as a way to show where he was in life. He probably thought about a bad credit score like someone in the Middle Ages might have thought about being kicked out of the church or like a 14-year-old might feel about not being in the "in crowd" at school.
I urge you to look at your options for getting out of debt in a realistic way when you are thinking about them. When I compare debt settlement to the other choices most people have, I think of a famous Winston Churchill quote about democracy:
Debt settlement is the worst way to deal with debt, besides all the other ways.
