What to do with too much credit card debt?
Picture that scary in-between financial moment, a kind of knife-edge living, when you have too much high-interest debt to pay off in any reasonable amount of time, but not so much debt that bankruptcy is necessary or inevitable. What do you do? A friend of mine, who would like to be known just as D, received an offer in the mail from Americor Financial Services, promising a new $27,000 line of credit.
D pays all his debt on time, but it’s expensive. He anticipates additional expenditures in the months to come. D called Americor to learn more. After offering up details over the phone on his financial situation, including how much debt he currently pays on, the representative described a plan. Begin paying Americor monthly, approximately $500 less than he currently pays, and cease paying on the rest of his high-interest credit cards.
After four to six months, the representative told him, Americor will be able to negotiate from a position of strength with his banks. The representative practically guaranteed that the banks would accept a negotiated settlement for 50 percent of what D owed.
Perhaps the most intriguing part of the Americor representative’s pitch to my friend is that Americor promised that his credit rating — which is currently strong — would only temporarily dip, for about six months. After that, it would bounce back quickly. In addi-
tion, the debts would be reported to the credit bureaus as “paid in full,” even if reduced to 50 cents on the dollar. I call BS on that part.
What about that original $27,000 line of credit promised in the mailing, my friend D asked the representative? That line, it turns out, is only available 16 months after enrolling in Americor’s program. The line of credit would cost 18 percent annually. The Americor representative assured D his credit would be good enough to obtain a better rate elsewhere, if he wanted to, at something like 8 percent.
That of course, would depend on having great credit 16 months later. Which, again, BS.
D told me, “No equivocating, they promised me that the old creditors would be happy and eager to extend me new credit at the end of the process.”
Wouldn’t his score go down, D asked Americor, repeatedly? D told me, “He said it would just go down in the beginning, but that sometimes you have to take one step back before taking two steps forward.”
The Americor representative told him, “People do this all the time.”
In fact, much of this pitch sounds like BS to me.
I left a message for the Americor Financial representative, who quickly returned my call and left a voicemail. When I finally reached him live, I identified myself as a person writing a finance column, interested in the details of his program. Perhaps naturally enough, he deferred to a supervisor who would be calling me back that afternoon, in a few hours. I received no call back. I followed up that afternoon, as well as four days later, but have only landed in voicemail. The original representative, eager and easy to reach at first, had ghosted me.
To give Americor the benefit of the doubt, banks do settle for less than the full amount owed on debts that have gone delinquent, especially perhaps over 90 days. But the claims about a quick bounce-back in credit score do not pass the smell test.
Here’s the real score on credit ratings. Credit card companies care a tremendous amount about both timely payments and full payments. They distinguish between 30, 60, and 90 days late on payments as increasingly severe problems. Any 90-days late payment has a lasting effect on your score. Accounts in collections and accounts not paid in full stay as negative marks on your credit for years. I simply don’t believe that a bank would ever report a debt “paid in full” to a credit bureau — the data provider on credit scores and credit reports — if it was settled for less than the full amount. That partial settlement, plus multiple 90-plus days late payments and collections activity would affect my friend’s credit for the next seven years.
True, this would be better than a Chapter 7 bankruptcy — which has an impact for 10 years on a credit report. Also true, bad information like late payments and debt settlements begin to fade in importance with time, so maybe five years after an Americor or similar treatment the negative effects could be largely counterbalanced with otherwise good payment history. But the claim that D would only suffer a temporary hit to his credit isn’t a reasonable claim.
On the knife’s edge, there’s a place for struggling through, sucking it up, and knocking out one’s debts the slow, hard way. There’s also a place for a fresh start through bankruptcy, or hiring a debtor’s attorney to negotiate for you, or even working with a debt negotiation company like Americor. A debt settlement company overpromising an “easy way” out of too much debt without hurting your credit, however, is just setting you up for disappointment.
D tells me he will not be going forward with Americor Financial.