Dear Credit Guy, I owe $20,000 on my credit cards. I’ve had some companies tell me they could reduce this amount by as much 60%. Can you tell me a good company to deal with? — Ed

Dear Ed, Paying a percentage of what you owe rather than the full amount is called a debt settlement. There are many different companies offering debt settlement services today. When you settle a debt or credit card for less than you  owed, your credit scores will likely be reduced significantly. If you are already more than ninety days late in making payments on your credit cards — which I hope you’re not — then going the debt settlement route will probably not cause your credit score to get much worse.

However, if you are current on your credit cards now, settling your debt will make your credit history much, much worse. The reason is because in most cases, creditors are only willing to settle a debt for less than the amount owed, when they believe collecting part of the debt is better than collecting nothing at all. When you are current with payments, the creditor has no reason to believe they will not be able to collect the full amount, and they are very unlikely to consider settling your account.

Debt settlement companies generally collect a monthly amount from you that you can afford to pay in addition to an initial enrollment fee. Rather than dispersing your payments to your creditors, they hold on to the payments for at least three to six months, depending on your circumstances. Next, they try and negotiate with your creditors on your behalf to settle the account. Keep in mind, you are making monthly payments to the settlement company, but nothing is being paid to your creditors, and you will still be receiving the collection calls from the people you owe.   Making no payments to your creditors is reported to the credit bureaus, and your credit score will tumble quickly. Once the creditor has agreed to a settlement amount and your account is settled, that will also be reported to the credit bureaus. Although the account will be marked paid, it will be not be marked paid-as-agreed, which is how you want any account that has a negative listing to be resolved.  See article written by Todd Ossenfort,

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