When dealing with credit card debt (or accounts in collection for that matter), there are generally two debt solutions available for consumers---debt settlement, also known as debt reduction or debt negotiation, and credit counseling. When determining which is the better option a lot depends on what you can afford on a monthly basis, your credit score, and the nature of your debt problem. Debt settlement is able to reduce your debt and payment by as much as 60 percent in some cases, but with this reward comes different risks and disadvantages that must be considered beforehand.
First, debt negotiation will affect your credit rating negatively (unless your credit is already very bad). When a program is completed your credit report will show your debts were "settled," which is not looked upon favorably by potential lenders. Secondly, there is no guarantee that your situation will work out completely as planned. In some cases your settlements will be lower than what was estimated, but in other cases it will be much higher. In some cases, a settlement may not be reached at all and a creditor will resort to legal action to collect the full balance. Although the last scenario is far from the norm, it is possible, and if you cannot accept some risk in order to potentially save thousands off your balance and thousands more when you account for savings from the interest charges, then settlement is definitely not your solution.
Consumer credit counseling, on the flip side, is a very conservative approach to debt management. Many agencies are non-profit and are funded primarily by the credit card companies. By enrolling in this type of debt service, you can enjoy from interest rate reductions, waived late fees, and a shorter time frame for getting out of debt. The main disadvantages of doing credit counseling are 1) the monthly minimum payment can be quite high, so consumers in need of serious debt relief will rarely find it in credit counseling; 2) it will in many cases still have a negative effect on your credit report; 3) it has a high failure rate because even one missed or late payment can cause the creditors to kick you out of the program.
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Consumer Debt Help Laws, Protections & Agencies
For any consumer dealing with credit & debt issues, the first step is to become informed of the laws and agencies that are here to protect you. The following is a brief summary of the most important consumer debt laws:
Consumer Credit Protection Act & Truth In Lending
Truth In Lending is actually a part of the Consumer Credit Protection Act, and it requires creditors to disclose to consumers any important costs and conditions of the credit being extended to the consumer prior to it actually being extended. The "important costs and conditions" being the APR (annual percentage rate aka interest) and finance charges in the case of credit cards or other revolving credit accounts. For installment loans, the creditor must disclose the amount being financed, the APR, the monthly payment, the number of installments, and the total and monthly finance charge in dollars.
The Fair Debt Collection Practices Act
This law, referred to as the FDCPA, deals with what rights consumers have when dealing with third party debt collection agencies. It applies only to consumer debt, not commercial debts or taxes.
The Fair Credit Reporting Act
This law, commonly referred to as FCRA, deals with the reporting of and use of information dealing with credit and requires the credit reporting agencies to keep accurate information about consumer in their credit reports.
The Credit Repair Organizations Act
This law requires a list of disclosures a credit repair company must make to a consumer prior to their enrolling in their services. Mainly, they must inform the consumer that no one can remove accurate and verifiable information from a person's credit report. Also, this act also prohibits credit repair companies from charging any up front fees until their service has actually been performed.
Equal Credit Opportunity Act
This law prohibits lenders from discriminating against a consumer on the basis of race, religion (Christian, Muslim, etc), national origin, sex, marital status, or age when extending credit.
The Fair Credit and Charge Card Disclosure Act
This law requires that all credit card solicitations and applications disclose the APR, annual fees, and grace periods before finance charges kick in.
The Fair And Accurate Credit Transaction Act
This law, abbreviated FACTA, gives consumers the right to one free credit report per year, the right to dispute credit information, and the right to know one's credit score.