Debt settlement: real help or waste?

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Dear Debt Adviser,
I have several credit cards that total about $16,000 in debt. I make my payments on time and always try to pay a little bit more than the minimum amount due. Just recently, I received a letter from a payment relief company. I called them and they said I would qualify for a “debt settlement program,” but now I am very confused. I’m not sure if I should get myself into this.

What is your advice? Thank you.
— Maria

Dear Maria,
I’m very glad that you wrote to me before you did anything. Let’s look at this from a different perspective, and I think that may help clarify the situation for you. I want you to pretend you are telling your mother that a man you don’t know wrote to you offering to solve your debt problems if you would just send him some money and then wait for him to get results. I know what my mother would say!

Debt settlement is what you are talking about here and that is a far cry from debt relief! The only person who will get relief is the person to whom you send your money. I believe you should definitely trust your instincts. A good rule of thumb is to have your scam-jamming radar up any time someone contacts you offering to provide a service for money or seeking information rather than the initial contact coming from you.

What appeals to many people when they first hear about debt settlement is that it appears they can get out of debt faster by paying less than what is owed. Unfortunately, the reality is that an overwhelming percentage of settlement schemes fail, leaving the debtor (that’s you, Maria) holding the bag and having to deal with some very unpleasant collectors, according to the Federal Trade Commission. Regardless of their success or failure, a debt settlement will ruin your credit, which can negatively affect your job, insurance premiums and more.

From your letter, it sounds as if you have somewhat of a handle on your credit card debt. I am worried that you are only paying a little bit more than the minimum each month. With a $16,000 nut to crack, doing it the way you are will take a lot of time and expose you to some risks you may not have thought about. Carrying that much debt with a variable interest rate in a tight credit cycle and in a tight job market could lead to a disaster if anything came along to alter your current situation.

A change in credit card terms or a change in your income could easily put you in an untenable position. So, I really want you to focus on getting that debt paid down as quickly as possible, not just a little at a time. If you don’t have a budget, get one — not to spend less, but to spend more wisely. People who don’t have a budget, whether it’s a general one or a detailed one, don’t know where their money is going. My years of experience tell me that this almost always means money that could be used to shrink your debt is going down the drain instead.

I also want you to begin a savings plan. Saving even a little bit each paycheck will allow you to stop using your credit cards for emergencies or unexpected expenses. Saving is critical, not only to get out of debt, but to stay that way. Try to make saving automatic through payroll deduction or direct deposit into an account. Once you start, believe me, you’ll never want to stop!

You can get some great up-to-date help on both budgeting and saving online. I particularly like Money Management International’s “New Beginnings” and “Tips for Change,” which are free downloadable e-books.

Good luck!

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