Are you drowning in credit card debt?
Maybe you’ve tried consolidating your credit card debt, but your credit score is too low to qualify. Perhaps you have too much to consolidate it all together.
Credit card modification might help in these situations, but it comes with serious risks. Here’s how it works.
1. What is credit card modification?
Beverly Harzog, a credit card expert and the author of The Debt Escape Plan, lumps credit card modification under the umbrella of debt settlement. The process of hiring a negotiator is similar, but the focus is on unsecured credit card debt.
With credit card modification programs, companies manage your debts for you. They get agreements from your creditors to let you pay less than you owe.
The results are similar to debt settlement negotiations. The negotiator works on your behalf to convince your creditor that you won’t be able to make all of your payments. Creditors then agree to settle for a smaller amount.
2. How does credit card modification work?
When you enroll in a credit card modification program, you stop making payments to your creditors. Instead, says Harzog, you make monthly payments to the company negotiating for you.
“These companies keep the money in an account,” Harzog explains. “As you make your monthly payments, the account grows. Down the road, when a creditor agrees, the money is used to pay the settled amount.”
Harzog says it can take six months or more for the first creditor to settle. After that, it might go faster. She also points out that once you enter a credit card into a program like this, you can’t use your credit account anymore — it’s considered closed.
3. What if creditors don’t agree?
Just because you enter debt settlement negotiations doesn’t mean that all your creditors will agree to the terms. “There are no guarantees in this type of business,” says Harzog.
A creditor may decide to sue you for the amount you owe after you stop making payments, Harzog points out. Depending on the credit card modification company you use, they might represent you in court in such a case.
If creditors don’t agree to settle your debt, the accounts that aren’t settled could be turned over to collections. At that point, you begin making payments to the collections company.
4. Credit card modification fees
When you hire a debt negotiator that agrees to represent you, there will be fees. The Federal Trade Commission prohibits debt settlement companies from collecting upfront fees for debt settlement. However, you can be charged fees after at least one debt has been successfully settled.
Additionally, many companies charge attorney fees. As Harzog notes, this is often a flat fee that’s rolled into your payment agreement with the debt settlement company, too.
On top of all that, you could end up with huge fees from your creditors. When you stop paying your credit card bill, those fees add up.
If the credit card modification is successful, those fees are taken care of in the settlement. But if a creditor refuses to settle, the fees are still part of your financial situation. Those extra charges could wipe out any savings you got from the settlement.
5. What does credit card modification do to your credit?
“Whether it’s credit card modification or debt settlement, your credit is going to take a hit up front,” Harzog points out. “You’re not making your payments, and that’s the biggest part of your credit score.”
However, Harzog continues, the impact starts to fade after a couple of years. “If you are in a tough spot, it’s a matter of priorities right now,” she says. “Get the debt taken care of and don’t worry about the credit score as much. You can rebuild your credit once the debt is gone.”
Plus, if you complete your credit card modification program, you might be able to get your creditors to mark your accounts “paid as agreed.”
Nonetheless, prepare for the consequences of poor credit. You likely won’t be able to get new loans, including credit cards. If you want to get a car loan or a mortgage in the next couple of years, says Harzog, credit card modification may not be for you.
6. Don’t forget about taxes
Harzog says one of the things many borrowers overlook is the tax impact of these programs. “No matter what it’s called, if it’s settled debt, it’s considered income to the IRS,” she warns. “Talk to a tax professional to work all that out.”
It’s important to plan for the possibility that some of the principal, interest, and fees that you end up not paying as the result of debt settlement negotiations could be taxable.
Your debt settlement amount could mean added income in the eyes of the IRS, bumping you into a higher tax bracket and making your tax bill unmanageable. As a result, you could wind up with a payment plan to the IRS once your debts are taken care of.
7. Watch out for scams
While there are legitimate credit card modification programs, Harzog points out that there are plenty of scams as well.
“If you decide this is the route you need to take, the number one thing is to be sure you go with a reputable organization,” Harzog says. She recommends that you start with the National Foundation for Credit Counseling (NFCC).
The NFCC offers the resources you need to get your debt under control and can walk you through possible options for your situation. Harzog says choosing companies and counselors that are NFCC-certified reduces the chances of being scammed.
The company you choose should also be transparent with their fees. Most debt negotiation companies charge fees, but they are often collected on a monthly basis, wrapped up as part of your program.
Harzog advises people to beware of companies that guarantee a settlement or modification program. Creditors can choose not to settle, and no negotiator can deliver a 100% success rate.
8. Can you do it yourself?
Before you decide to pay someone else to negotiate with your creditors, Harzog suggests trying yourself. “Contact the credit card issuer yourself,” she says. “They have hardship departments and can maybe help you.”
As long as your account isn’t in collections, she adds, many creditors will work with you on a modified payment plan. You might still have to close the account, but at least you won’t pay extra fees.
However, creditors’ hardship programs might not work as a long-term solution, Harzog says. If you think it will take more than a year to sort out your problems, that option may not be ideal.
9. Who should consider credit card modification?
In the end, Harzog says, these types of programs can be helpful to consumers overwhelmed with debt and verging on insolvency. However, she advises they be used as last resorts.
Before you turn to credit card modification or debt settlement, try other avenues first:
- Transfer your balance to a credit card with an interest-free introductory offer, then pay off your debt before that offer expires.
- Consolidate your debt using a low-interest personal loan.
- Make a plan with a credit counselor.
- Come up with a debt repayment plan and try to get ahead of it yourself.
In some cases, Harzog acknowledges, you just can’t get there on their own. If your payments and interest are sucking up too much of your income and you aren’t eligible for other programs, credit card modification programs and debt settlement can be last-ditch efforts.
“If you really don’t see any way out,” Harzog says, “this can be the option you try just before bankruptcy.”
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|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
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* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
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Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
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