Avoid the debt settlement agreement benefit on your credit card
If you have credit cards, you’ve heard the credit card balance protection sales pitch. It used to be that for the price of 99 cents per month for every $100 of outstanding balance on the card, your credit card company would allow you to skip the minimum monthly payment for as many as six months in the event you were suddenly hospitalized or unemployed. Now it goes under a new name – debt settlement agreement – and consumer finance experts are urging consumer to just say “no.”
How a debt settlement agreement works
According to Consumer Reports, a debt settlement agreement is a promise to maintain your FICO score in the event that you become disabled, lose your job or experience a major life-disrupting event like the death of a child or spouse. While it may sound nice not having to worry about your credit rating during a personal crisis, the U.S. Government Accountability Office has issued a report stating that the product is not worth the price – it’s a moneymaker for banks, plain and simple.
The GAO says debt settlement agreements raised $2.4 billion in 2009. For each $1 consumers paid for debt protection, the bank pocketed 55 cents in pre-tax earnings. Consumers only benefit from 21 cents of each dollar they pay for a debt settlement agreement. The GAO study also showed that only one in 20 credit card holders who were paying for the service actually used it.
Why debt settlement agreements are wrong for consumers
- Debt settlement agreements are loaded with fees. Depending upon the credit card company, consumers must pay from 85 cents to $1.35 monthly per $100 of outstanding balance for the service. Over the course of a year, that’s as much as a 16.2 percent APR, on top of the finance charges that come standard with the credit card. Sock that money away for a rainy day, instead.
- Most debt settlement agreements only cancel the minimum payment, but interest continues to accrue. At best, a consumer may find a card that freezes both the minimum monthly and interest, but the principal balance is still there.
- Read the fine print. Not all change-of-life conditions provide the full extent of benefits, particularly if the credit card carries a high balance ($10,000 or more).
Is credit protection a good deal?