The Easy Way Out Through Debt Settlement?

If you believe the radio advertisements, if you have huge amounts of credit card debt, you can simply make it disappear by calling a debt settlement company. These companies claim to be able to cut your credit card debt by more than half.

If it sounds too good to be true though:

In the case of two debt settlement companies sued last year by New York State, the attorney general alleged that no more than 1 percent of customers gained the services promised by marketers. A Colorado investigation came to a similar conclusion.

The industry’s own figures show that clients typically fail to secure relief. In a survey of its members, the Association of Settlement Companies found that three years after enrolling, only 34 percent of customers had either completed programs or were still saving for settlements.

The New Poor - Peddling Relief, Firms Put Debtors in a Deeper Hole (New York Times)

Debt settlement firms have a simple strategy they offer to people. Stop paying money towards credit card bills, and instead send the money to the company. They'll take a huge cut of the money in fees, and after a few years, (if you haven't been sued by the credit card company for failing to pay!) they'll attempt to settle your debts with the credit card company with some of the money you've sent them. The only problem is that it apparently almost never works out.

There are much better ways to lower your credit card debts, by working with the credit card companies directly or with some of the reputable companies that partner with them. CreditCard.com has an article about the best steps to take when overwhelmed by credit card debt (and includes yet another warning not to use debt settlement firms) at Credit card debt negotiation in 3 (not) easy steps.

Betting against the credit card company

The rich ruleth over the poor, and the borrower is servant to the lender.   Proverbs 22:7

We have some friends who had a goal - and it was a very good goal. It would cost a lot of money, but it was the type of expense that results in an equal size tax credit, meaning that they would get all of the money back during the next tax season.

They were able to find a credit card that offered 0% interest for one year, followed by terrible interest. They put most of the debt on the credit card, knowing that they would be able to pay it off before then, with their tax refund.

Let's pause for a moment here, and ask a simple question: Are credit card companies generous? Did they give my friends this card just to help them out? Certainly not. The company gave them this card because they knew that, statistically, a high enough percentage of people would fail to pay off the card after one year to make up the losses on all of the people who did pay it off after one year.

Basically, trying these sorts of tricks are like betting against the credit card companies.

Our friends ran into a problem with this expense - and because of the intricacies of tax law, they would not be able to put the tax credit on the current year's return. They would have to wait until the next year. They suddenly had a looming deadline to pay off the credit card, and no money with which to do it.

Credit card companies are devious. Hence, my rule:

• If you don't pay off your credit card in full every single month, just cut it up.
  

A minor variation on this rule was discussed in the Ensign:

In Charge of your Charge Card