INDIANAPOLIS – The current climate of high inflation and prices is apparently causing Americans to lean on credit cards more often.
According to Lending Tree, Americans had a total credit card balance of $887 billion in the second quarter of 2022. That was a $46 billion jump from the first quarter of the year.
“National statistics are showing that credit card debt is starting to go up,” said Forum Credit Union Chief Operating Officer, Andy Mattingly.
During the COVID-19 pandemic, Mattingly says credit card debt took a dip as many Americans found help from government relief funding programs. Now, credit card balances are creeping back up to 2019 levels.
“People are coming in and saying ‘Oh my, I can’t believe where my balance is’ and ‘I’ve got to find a way to get out of this,’” Mattingly said.
Facing increasing balances and minimum monthly payments, many people turn to different strategies to get out of debt. Aside from budgeting and cutting expenses, credit consolidation and counseling are offered by a number of financial institutions and non-profit agencies and are generally considered effective ways to tackle high balances.
However, Mattingly says you should be cautious before accepting offers from debt “settlement” companies.
“A lot of debt settlement companies will talk and use the term consolidation, which is what financial institutions use,” Mattingly said. “But then as you start looking on, they’re like ‘We’ll get settlements for you.’ And that’s the key phrase I think you really want to be careful of when you start seeing that.”
Here’s a typical example of an offer from a debt settlement company:
Say you owe $20,000 in credit card debt. A debt settlement company may offer to work with your lenders and negotiate the total down to $12,000.
“They’re trying to get some of that debt reduced, and they’re going to tell you to stop paying your creditors because we want to work out a settlement,” Mattingly described. “Well then you start racking up late fees and your credit score can start to be hindered because it may take them 90 to 120 days to work it out.”
Once the company negotiates a $12,000 settlement, you’ll be expected to repay that amount to the settlement company. However, the company could also charge you a 25% fee, adding another $3,000 you owe. While it appears you’ve saved yourself $5,000 on your debt, the costs don’t stop there.
The credit card lenders are likely to “charge off” the $8,000 removed from the original $20,000 as a bad or unrecoverable loan. And that counts against you.
“If those financial institutions charge off some of those loans, then that’s going to be on your credit for seven years,” Mattingly cautioned.
What could amount to a 100 point hit against your credit score could cost you down the road.
“Let’s say you need a new car,” Mattingly said. “Maybe you could qualify for say 5-percent. But now your credit score is so bad that you now have to pay 12 or 13-percent for that car loan.”
“Depending on the type of car, now maybe you’re paying an extra 100 dollars a month for a car loan that you could have gotten cheaper,” he continued.
It’s important to know that credit settlement companies can’t guarantee what kind of settlement they’ll be able to reach with your lender. If you decide to research a debt settlement company, you can search them by name on the websites of the Better Business Bureau, Attorney General, and agencies like the Consumer Financial Protection Bureau.
If budgeting and cost-cutting aren’t enough to get rid of your credit card balances, Mattingly recommends looking into credit consolidation, credit counseling and management as safer options. You might also be able to transfer your credit card balance to another card that offers 0% interest for an introductory period. The key to that strategy would be paying off the balance within no-interest window.