People may take on large amounts of debt in short amounts of time due to medical emergencies or job loss. Other times, debt may develop slowly, as people spend slightly more than they can pay every month on their credit cards. Regardless of how quickly debt accrues, those dealing with unsustainable levels of household debt may look into different solutions for regaining financial control. People are often eager to avoid bankruptcy and may look into a variety of different financial services instead.
Unfortunately, the types of services regularly marketed to consumers struggling with debt are often less helpful than people expect. In many cases, so-called debt solutions can actually worsen the financial circumstances of the people in need of help.
Debt settlement services
Companies that settle debts claim that they can negotiate a lump-sum settlement for only a fraction of the full amount of money due. While that may be true, there are several consequences for credit card settlements. The first is that credit card lenders tend to close lines of credit completely when people settle what they owe. Individuals may lose multiple credit cards at once, which can affect their financial flexibility and drag down their credit scores. The credit card company can report the account as settled instead of paid in full. Finally, the settlement company usually offers a loan to cover the cost of settling the debt. Those loans might eventually lead to increased overall debt levels.
Balance transfers
Credit card companies frequently offer competitive balance transfers for very low interest rates. However, those interest rates tend to expire after a certain amount of time. Credit card users may find themselves dealing with a large amount of interest applied to the account all at once. Credit card companies also frequently charge fees calculated based on a percentage of the overall amount transferred.
Debt consolidation
When people go over the limit on their credit cards, they get hit with a fee. If they make their monthly payment late, they have to pay a fee. The more credit cards people have, the more monthly fees they may accrue. A debt consolidation loan combines every credit card balance into one loan. People can avoid scenarios in which they accrue hundreds of dollars in fees through multiple different accounts each month. However, the consolidation loan that they take out may have variable rates that apply.
Bankruptcy is generally better than most debt services provided by businesses. Unlike other debt solutions, bankruptcy actually eliminates eligible debts. Filing for bankruptcy can help fully resolve credit card debt instead of simply changing a company that receives a payment.