How does the interest rate charged on the settlement of credit card debt stack up against your other debt relief options? Is it more? Less? Equal? Let's have a look...
Here is what you can expect to pay in interest depending on the debt relief route you choose.
Option #1: Status Quo
Your first option is to continue to pay your credit card bill every month when it comes in. The problem is, that if you are struggling to make the minimum payments each month (and perhaps you have even missed a payment or two) you could be paying interest charges in the 30% range. And at this rate it is unlikely that you will ever pay off the credit debt in your lifetime. In other words, you will be saddled with that debt until the day you die.
Option #2: A Payday Loan
An even worse scenario than paying 30% interest, is taking out a payday loan in order to make the payment(s) on your credit card or to consolidate your credit card debts. Interest charges on these type of loans are typically in the 200% range or higher!
Option #3: Debt Consolidation
When you enroll in a debt consolidation or "Debt Management Program", the interest rates that you are currently paying on your credit card debt can be reduced dramatically. How much depends on the credit card company. However, a debt management program will cost you anywhere from $25 to $85 per month. Assuming a $50 per month fee and a debt load of $10,000 that works out to an effective interest rate of 6% per year ($600 / $10,000 = 6%). And worse, as the debt amount decreases over time, the effective interest rate you are paying will increase. If after 3 years in the program your debt has been reduced to $5,000, and you are still paying $600 per year in fees, these fees now represent an effective interest charge of 12% on top of the interest you are already paying the credit card companies.
So even if your credit card interest rates were reduced to 10%, when you add on the 6% interest in the form of monthly fees, the "real" interest charges you are paying start to creep back up towards 20% or more.
Option #4: Settlement Of Credit Card Debt
Now, if you know anything about how debt settlement programs work you know that they don't charge interest in the way that we normally think of interest. But like debt management programs, these settlement programs do charge fees that can in a way be looked upon as interest charges.
In most instances, debt settlement fees typically work out to 15% of the amount of debt that is brought into the program. For example, if you are looking for a settlement of credit card debt totaling $20,000, you will likely pay $3,000 in fees to the settlement agency handling your negotiations. And if that is the case, let's see how this translates into an effective interest rate.
Let's say that in the first year of the program you have to pay $2,000 in fees. Based on $20,000 worth of debts, that works out to an effective interest rate of 10% ($2,000 / $20,000 = 10%). In year two you pay the balance of $1,000 or a 5% effective interest rate ($1,000 / $20,000 = 5%). In year three (most programs only last 3 years or less) you pay nothing. What's the effective interest rate in year 3? That's right, 0%.
Credit cards... 30% per year for... life?
Payday loans to consolidate debt... forget about it!
Debt consolidation programs... interest paid to the credit card companies plus the effective interest charges paid to the consolidation company can easily start at 15% for the first year of the program and escalate after that.
Settlement of credit card debt... 10% in year one, 5% in year 2 and 0% in year three.