Business booms for debt settlement
— -- The economic downturn has increased demand for companies that claim they can make consumers' credit card debt disappear. But many consumers who sign up for these services end up with even more debt, along with seriously damaged credit scores, consumer advocates say.
Delinquencies on consumer debt have hit a record 3.23%, the American Bankers Association says, and the percentage of borrowers at least 30 days late have hit the highest level in at least 35 years. Last month, consumer bankruptcy filings jumped 22% from a year earlier, the American Bankruptcy Institute says.
That is boosting business for debt-settlement firms that negotiate with credit card issuers to try to reduce what the consumer owes. They typically tell borrowers to stop making credit card payments, often instructing them to make the payments to the debt-settlement company instead. The firms say that step is necessary because credit card issuers won't negotiate until a borrower is behind on payments.
The problem is, credit card issuers will report the borrower's failure to make payments to the credit bureaus. Late payments are a credit score killer: Payment history accounts for 35% of a borrower's all-important FICO score.
Even if the settlement firm negotiates a lower debt, late payments will stay on the borrower's credit report. In addition, the borrower's credit report will reflect that the amount was settled, not paid in full. This information will remain on the borrower's credit report for seven years, says Evan Hendricks, author of Credit Scores & Credit Reports.
Dave Leuthold, vice president of The Association of Settlement Companies, says many consumers seeking debt relief have already seen their scores plummet. "Basically, what they're deciding by coming on to a debt-settlement program is that getting out of debt is more important than their credit score," he says.
A debt-management program with a credit-counseling agency offers borrowers an alternative that won't damage their credit scores, says Gail Cunningham of the National Foundation for Credit Counseling. In a typical debt-management program, the borrower writes a check to the credit-counseling agency, and the agency makes the monthly payments. The agency may negotiate a lower rate, but the amount owed isn't reduced, she says.
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