Can You Believe Those Debt Reduction Ads?

by Gary Foreman

You’ve seen those debt reduction ads that promise to greatly cut your credit card debt, sometimes as much as 50%. Can these companies really do what they claim?

Gary,
I heard an advertisement on the radio about calling a toll free number to talk about cutting credit card debt in half. Is there a possible way to have one-half of a $5,500 credit card debt forgiven?
Joan

Most of us have heard them. Ads encouraging us to call them and have our debt reduced. And, most of us have wondered if it can possibly be true. Let’s take a look at those ads.

Typically there are two types of firms that have similar ads. Credit counseling agencies and debt settlement firms.

Credit Counseling Agencies

A credit counselor will contact your credit card companies and work out a payment plan for you. Typically they’ll get a lower interest rate for you and penalty fees will be stopped. But the amount owed will not be reduced.

The lower interest rate and elimination of penalties can significantly reduce the amount it will cost you to repay the debt. Sometimes ads will make it sound as if they’re reducing the amount owed, but a closer listen will show that’s not the promise. They’re just promising that you’ll pay less.

Debt settlement is different. There you come to an agreement with your creditor on a reduced balance. Generally that reduced balance is paid at the time of the agreement and will be regarded as payment in full.

Related: Am I a Good Candidate for Credit Counseling?

Debt Settlement Firms

Debt settlement is usually offered to hardship cases or to people that the credit card company doesn’t expect to be able to repay their debts. Often the borrower is already late in making payments. Creditors are not obligated to negotiate a settlement, so there’s no guarantee that you’ll get one.

Debt settlement companies will want to be paid for their efforts. Typically they’ll charge a percentage of the amount owed or the amount that they negotiate away.

Not all are honest. If they suggest that you stop paying the credit card company and make payments to them instead, that’s a flashing warning sign. Tread very carefully.

You can negotiate with the credit card company yourself. You do not need a firm to do it for you. It will require some research and effort on your part to work through the process.

Debt Settlement and Your Credit Score

Your credit score may be affected. Asking about debt settlement won’t ding your score. However, if you’re successful in negotiating a settlement that will lower your score by around 100 points according to a GAO study. Those with a higher score lost more points. If your FICO score was lower, you took a smaller hit.

The negative information on the settlement will remain on your report for seven years. But the effect will be gradually reduced if you make all your other future payments on time.

Choosing the Best Option for Your Financial Situation

So what should you do? You don’t say whether you’re behind in your payments so we’ll assume you are not. We’ll also assume you’re just having a bit of a struggle to keep up with them.

If that’s the case, you probably should forget the ads. Even if you had the money for a debt settlement, the hit to your credit score would be significant. And credit counseling is typically for people with a balance of $10,000 or more.

A better plan would be to contact your lender and ask for a lower interest rate. If you’ve been good about making your payments, they may accommodate you.

If they don’t, look for a “balance transfer” card. See if you can’t find one with a lower rate.

After you’ve made the transfer, don’t just pay the new minimum. Continue to pay your old, higher minimum. You’ll end up reducing the amount of interest you pay. In effect, you’re doing much of what a credit counselor could do.

• Do Credit Repair Services Really Work?
• 50 Things Anyone Dealing With a Debt Collector Should Know
• How to Avoid Credit Repair Scams
• Am I a Good Candidate for Credit Counseling?
• Watch Out for These Credit Repair Red Flags

Reviewed May 2022

About the Author

Gary Foreman is the former owner and editor of The Dollar Stretcher. He's the author of How to Conquer Debt No Matter How Much You Have and has been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.