How Debt Relief Programs Work

There are hundreds of debt relief programs available for people who have gotten in over their head with credit card debt. There are a few things that you need to know before signing up with one of these companies. Yes, they will do what they say. Your debt can get consolidated to one payment which will go mostly towards the principal balance, however most of the time there is still interest calculated into the payments.

How debt relief programs work:

Debt relief programs start by setting up accounts with all the major creditors. This includes credit card companies, banks, auto loan companies and even retail stores that offer their own credit cards. The major companies include American Express, Chase, and Capital One. They then negotiate with the creditors to fixed interest rates which will then lower the customer’s rates. Typically with credit cards the interest rates are in the 20-25% range. This will be lowered to the neighborhood of 5-10%. In some rare cases where there is an exorbitant amount of debt, the interest rate could be lowered to 0%. Its these special cases where the creditors just want to recover as much as they can.

Now that the debt settlement companies have pre-negotiated arrangements with creditors, they now need customers. You’ve probably already seen debt relief programs advertised on cable news channels and other various forms of advertising. They’re trying to get you to call and get set up with them. Typically they’re looking for people who have accumulated over $10,000 worth of debt. This is the magic number that they know they’ll make a lot of money off of you as a client.

Once you’re signed up with them, you’ll pay them once each month. They’ll take that money and break the payments up amongst your creditors. They’ll also charge something like a $25 service charge. Keep in mind that they also get a percentage of what they help collect for your creditors. These companies make out like bandits. They do provide a valuable service though and do help people get out of debt.

What you need to know before you sign up:

You have to provide the debt relief program company with your bank account so they can directly withdraw money from your account each month. They will not allow you to pay them with a check like any other bill. They also will require you to make payments every month or you will be removed from the program. If they kick you out of the program then all deals with your creditors are off. You’ll go back to paying the high interest rates. This will all be in the form of a contract which you will sign before starting the debt relief program. Also, you cannot directly pay off your accounts with your creditors once you’ve began the program. They will no longer accept your money. You can however pay extra each month to the settlement company which will all go towards the principal balance. I highly suggest making additional payments per month. Every little bit counts, even if you only have a few extra dollars that you can contribute. You’ll be surprised how quickly you can pay off debt by making those extra little payments.

Benefits of joining a debt relief program:

The main benefits include having only one payment to manage each month. Also your total interest rates will be greatly decreased which will allow you to pay off the debt faster. You have a schedule so you’ll know exactly how long it’ll take to be debt free. Essentially there will be a guaranteed light at the end of the tunnel as long as you stick with the program.  One of the biggest benefits is the feeling of freedom debt relief once your balance has been completely paid off.

Negatives:

Your credit will reflect the fact that you entered into a credit counseling program. This will not directly impact your actual credit score, however it is a key indicator that some major creditors look at before giving a loan. American Express for example will not award a credit card to someone with this black mark. After a few years it’ll drop off, however during that period all potential creditors will have the ability to find out that you’ve entered into a credit program. Good luck on your quest to become debt free!