When you decide to do something about the debt you owe, you may face a plethora of potential solutions. Consulting with debt experts like Freedom Debt Relief can help you decide between debt negotiation, consolidation loans, and home equity solutions.
The solution for you may not match the solution your neighbor used or your sibling. That’s why every effective consumer debt relief solution starts with a personal financial assessment. Depending on your income, total debt, and financial picture, debt negotiation may provide the most effective solution.
Debt Negotiation Explained
When you negotiate your debt, you phone or write to each creditor, explaining your financial hardship and requesting a renegotiation of your amount owed, your interest rate, or both, according to NerdWallet. Because credit card companies want to get at least some of the money owed to them, they will often accept a percentage of the amount owed as a lump sum payment. This means that you need to have the money saved, so you can immediately pay them when they extend an offer.
Self-negotiation of Debts
Some individuals want to talk to their creditors themselves, so companies like Freedom Debt Relief provide them with a script to use when phoning each credit card company. These types of debt relief companies also provide individuals with tips like who to ask to speak to at the credit card company. This lets you skip the customer service representatives who do not have the clout to set up such agreements. According to Forbes, doing this usually results in significant savings of up to 50%, but once you pay the settled amount, the credit card company closes your account.
Outside Negotiation of Debts
Some credit counseling and debt consolidation non-profits handle the contact with credit card companies and other creditors. In some cases, these non-profits can negotiate savings of more than 50% off the debt because they have standing agreements with the financial lender. Participation in these programs typically requires closing all the credit cards.
After the Credit Negotiations and Payments
After you’ve negotiated settlements and paid your credit cards off, you probably expect to see your credit score skyrocket. Here’s a warning. It will plummet first, then improve. This scares some people who think that by entering a debt management program, they will instantly fix their debt problem and their credit score. That isn’t how it works.
Your credit score is based on your credit history, which you can’t change unless it contains an actual mistake. Late payments, missed payments, and closing a credit account all lower a credit score. Having too many lines of credit also lowers your score, as does using too high a percentage of your total available credit.
Each creditor reports when you paid your settlement and its amount. They mark your account closed. In the algorithm used by credit bureaus, closing an account receives more weight than paying one-off. For this reason, as you negotiate your way out of debt, your credit score drops a little each time you pay off an account.
Once you pay off all of the debt, apply for one new credit card designed to help you reestablish your credit. Also, register with a program, such as the one Experian offers, that reports your rent or mortgage payment, cell phone bill, and utility bills paid as credit accounts. Your timely payments can raise your score by about 5 points per month. Most individuals who pay on time for six months in a row experience a 25-point surge in their credit score. Getting out of debt takes time and effort, but debt negotiation can eradicate your debts quickly.