The amount that the average American spends on the holiday season continues to increase every year. With the accumulation of interest, that debt burden is sure to compound and follow shoppers well into the New Year and beyond.
For some, this new debt will be what pushes their financial struggles from “manageable” to “disastrous.” Additional credit card payments, increased interest, and the psychological toll of dealing with extra debt can often spark a financial crisis.
In situations such as these, people often turn to debt relief firms for help. Debt relief firms are able to help individuals get out of debt regardless of their credit scores or how much they owe as well as consolidating their payment into one, usually lower payment. For someone who’s in too deep with creditors, promises like that can be music to their ears.
However, how exactly do you use a debt relief firm? What kind of services do they provide? How does the process work? Will using a debt relief firm actually lead to financial stability in the end?
These questions are common, so we developed a nine-step process designed to help people use a debt relief firm to relieve themselves of their holiday debt.
1. Understand debt, and understand how it affects credit
Understanding just how seriously dangerous debt can be is the first step toward getting serious about eliminating it.
On its own, debt is more than just a monthly payment to a creditor; it closes the door on other opportunities. People who dedicate 50% of their income to paying down debt forfeit half of the money they make just to keep their creditors happy. That 50% could be saved, invested, or spent wisely.
On top of that, high debt levels can negatively affect your credit. About 30% of the FICO score calculation depends on factors associated with debt, including payment history and overall credit utilization. In short, the more debt you carry, the worse your credit score is likely to be.
Debt, then, is not just a monthly annoyance; it can have wide-reaching effects. For these reasons alone, dealing with debt aggressively and proactively is a wise option.
2. Try to get out of debt yourself
While the idea of letting a debt relief firm take the reins and drive the debt repayment process can be attractive, it’s worth exploring whether you can handle paying off your debt yourself.
Often, this boils down to coming up with an effective repayment strategy that focuses on aggressively paying down certain debts in order to get out of debt as fast as possible. There are two schools of thought here: the debt snowball and the debt avalanche.
The “debt snowball” strategy calls for you to pay down the debt with the smallest current balance. This is the easiest debt to eliminate; by paying it off, you free up even more money to pay down the next-smallest debt. In other words, it’s a snowball effect.
The “debt avalanche,” on the other hand, calls for prioritizing the debt with the highest interest rate. This strategy can help you save the largest amount of money in the end, but it can be difficult to keep up with, as high-interest debts also tend to carry large balances that are difficult to pay off entirely.
Sitting down and crunching the numbers with one of these strategies in mind can help you figure out if you’re capable of paying off your debts without help. If you find that you simply can’t afford to pay off debts in a timely fashion, then it’s worth considering outside help, such as a debt relief firm.
3. Understand what a debt relief firm does
While “debt relief” is a broad term that can encompass many different strategies for eliminating debt, most debt relief firms specialize in a particular practice called “debt settlement.”
Debt settlement, at its core, is the process of negotiating with creditors in order to “settle” debt for less than what’s currently owed. Debt relief firms do this on a professional level on behalf of debtors of all levels of debt and income.
The usual process is relatively simple. A debtor contacts a debt relief firm for help. The debt relief firm opens up a savings account for the debtor, who pays into the account once per month. In the meantime, the debtor ceases payment to creditors.
After enough money is in the account, the debt relief firm contacts the creditors to negotiate, offering a single lump payment on the debt in exchange for elimination of the remainder of the debt. The creditors, eager for any sort of repayment, often take the deal.
In broad strokes, then, debt settlement is similar to debt consolidation for debtors. Instead of paying their creditors, they make a single payment per month with the aim of saving money and eliminating debt sooner rather than later.
4. Weigh the risks against the rewards
Debt settlement, like any form of debt relief, has its pros and cons.
On the pro side, debt settlement often saves debtors huge sums of money. When creditors agree to accept less than owed, the debtor comes out ahead.
Debt settlement can also be a faster process than other forms of debt consolidation. Settling a debt might take a year or more, but paying off a large debt consolidation loan might take much longer.
On the con side, debt settlement can be risky. There’s no guarantee that creditors will agree to the negotiation, and past success by the debt relief firm does not guarantee future results.
Debt settlement can also be detrimental to a person’s credit. By ceasing to pay their creditors, debtors will almost certainly see their credit scores take a hit.
In many cases, the pros outweigh the cons, but every individual should take the time to consider their financial situation in detail before they decide to sign on with a debt relief firm.
5. Know that you can settle your debt by yourself
Technically, a debt relief firm doesn’t do anything that an individual debtor cannot do. Debtors are fully capable of calling their creditors and demanding to negotiate, and many people do make progress in this manner.
That said, settling your own debt can be a difficult and tedious process. You’re likely to deal with constant harassment from your creditors, as well as from collections agencies. On top of that, it can be difficult to know what to ask for and when if you don’t have experience settling a debt in the past. For these reasons and many others, most debtors who seek debt relief choose to go with a professional debt relief firm instead.
6. Choose a company that you can trust
Unfortunately, not every debt relief firm is the same. The debt relief industry has a bad reputation for being untrustworthy and predatory.
People seeking debt relief are often desperate for solutions. They’ve tried to pay off their debts themselves and failed to make significant progress. They’re hurting financially and looking for someone that can make their problem go away. Bad actors in the debt relief space prey on people like this, making outrageous promises and failing to deliver on them.
For that reason, it’s vital to choose a debt relief firm that you can trust to work in your best interest. Browse trustworthy reviews, check the Better Business Bureau, and be skeptical when any company tells you that it can solve your debt problems for you. There are plenty of reputable debt relief companies out there; you just have to find them.
7. Ensure that you can keep up with your payments
If you do opt for debt relief, make sure that you can handle it. You need to be 100% sure that you’ll be able to keep up with your payments all the way through.
The reason is that most debt relief firms will drop you from their program if you can’t make your payments. You’ll still suffer the cons of debt settlement – harassment from creditors, a damaged credit score – without any of the pros. It’s the worst-case scenario.
8. Stay disciplined
Getting through debt settlement is tough. If you’re going to make it work, be prepared to cut back, be frugal, and be ready for anything. You’ll likely have to make sacrifices, and you definitely won’t be able to rely on your credit cards to finance your lifestyle. Debt settlement is no walk in the park, but if it’s right for you, it’s worth it.
9. Check your credit report to be sure the debt is gone
Finally, once you’ve completed the debt settlement process, make sure that it’s had the intended effect. Check your credit report and make sure that the debt is gone. While you’d hope that credit reports are accurate, that’s not always the case, and if your debt is still on there, you’ll have to file a dispute, or else the debt settlement process was for nothing.
If you can follow these nine steps, then you should have no problem working with a debt relief company to eliminate your holiday debt and set the foundation for a bright financial future.