Smart Money:

[cereta]

DEAR BRUCE: My question is regarding the companies that help lower the interest rates and payments on your credit cards. When you sign up for the program, the one negative is that they close your credit cards so you can't use them while you pay them off. I understand that, but will my credit score drop when they close my credit cards, and how much would my score drop? -- George

DEAR GEORGE: You wrote that one negative is that a debt settlement company will close off your credit card, which is true in some cases, but certainly not in all. For some people, even though they had a problem, the necessity for having access to credit is overwhelming.

Nonetheless, I wouldn't worry about your credit score dropping when the cards are closed. How much the score will drop is not relevant at this point. If you are getting help to negotiate with credit card companies, your credit is already in lousy shape and the only way to fix it is to get it completely cleaned up. Concentrate on that. Once you get your credit established again by paying all your bills, you'll be surprised how fast you can rebuild a credit score, which will then be attractive to many lenders.

Comments

[cereta]

I don't talk about this much, but spouse and I are in a debt relief program right now. I know programs vary, but with ours, the issues wasn't that they closed the cards; it was that in order to get the companies ready to negotiate, we had to stop payments entirely until a settlement was reached. And yes, our credit rating is in the toilet (although we are still getting pre-approved card offers, which is just everything that is wrong with our economy). But as Bruce said, it was pretty bad already, and was only going to get worse if our situation had continued as it was. Now, at least, we expect to be credit card debt-free in the near future, and we're already paying less than half of what we were just to keep up with the minimum payments.

[shirou]

I'm glad programs like that exist. And honestly, I'm a little amazed they're so effective. Are you in the US? The policy environment here generally puts all the power in the hands of the more economically advantaged--the lender, landlord, etc--so I'm pleased but surprised to learn that debt relief programs can succeed in getting credit card companies to negotiate.

[cereta]

I'm in the US, yes. I think the fact that so much power is in the hands of the lenders is exactly why these programs exist: they put an equally large company, as well as a law firm, behind the lender. I've really been amazed at what they've accomplished for us. Sometimes I feel a little guilty about the settlements, but then I remember that (a) the alternative would have been bankruptcy,* and (b) we have doubtless paid what we owe in all those months of making minimum payments (which are mostly interest).

*No judgment on those who've had to take that route.

[jenett]

I did one post-divorce, and it was tremendously helpful - yes, they closed my existing accounts, but once I was through the program, I didn't have problems rebuilding credit, and I've not had problems using it since. (My issues with debt were mostly situational, which is much easier to manage now.)

Delinquent accounts are much more of a hit on your credit score than a small number of accounts. And the debt relief programs (the good ones) have experience working out the details so once the debt is cleared, there's nothing on your record, usually.

And they saved me a lot of money in negotiation (lower interest rates) and a tremendous amount of stress in managing it, since once it was set up, all I had to do was make the monthly payment to the program. I could see real progress in things improving pretty quickly.