Beware debt settlement

Consumers who are in debt have likely received several offers from companies claiming that they can reduce their payments and use consolidation tactics to make them pay less.

According to the Detroit Free Press, these promises are often too good to be true. Consumers need to watch out for these companies and avoid buying into their schemes, especially if they charge any money up front. An increasing number of consumers have been scammed in recent years by companies promising to reduce debt.

The FTC has filed more than 20 lawsuits over the past few years against these settlement companies, but even taking the companies to court doesn’t guarantee that consumers will get their money back. Some new rules should highlight those companies using deceptive practices, however.

Companies now cannot charge fees until after they’ve provided a service. They also can no longer misrepresent themselves as non-profits. When making claims about slashing debt by 50 percent or a similar figure, the company must also factor in any fees that they will charge. For example, a company that earns a $5,000 settlement for $10,000 worth of debt cannot say they slashed debt by 50 percent if they then charge $2,000 in fees, as that’s actually forcing the customer to pay 70 percent.

It is possible to pay less if the lender agrees to a debt settlement. But saving up for this kind of lump sum will take time and usually still hurt a credit score.

A better avenue for repairing credit is to use credit responsibly. Consumers can use a car payment calculator to see if they can afford a bad credit auto loan. If they can, making the payments in full every month will slowly but surely cause their credit score to rise.