Trying to settle your credit card debt? Watch these 4 red flags

Several years of high inflation are still straining the budgets of millions of Americans. Despite recent cooling, essential living costs like food, gas and housing remain elevated. Many pinched consumers are turning to their credit cards to make ends meet. 

Consequently, many are becoming more reliant on credit cards, with an average credit balance of around $8,000. With credit card interest rates averaging 23.37% and exceeding 30% on some retail cards, the cost of carrying a balance can create an untenable situation for many.

Credit card repayment strategies, debt consolidation and balance transfer cards offer practical ways to manage your debt. Non-profit credit counseling agencies can also be invaluable tools to help you regain control of your finances. 

Debt settlement programs may make sense for those on the verge of bankruptcy as they help reduce the overall amount of debt you owe to creditors. While many reputable debt settlement companies can provide debt relief, it's essential to identify the red flags to avoid the untrustworthy ones. Below, we'll detail four to know.

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4 red flags to avoid when trying to settle your credit card debt

Having high-rate credit card debt can be stressful. Don't add to it by missing these four debt relief red flags:

Servicers charge upfront fees

Perhaps the most obvious sign a debt settlement company isn't legitimate is they require you to pay a fee to settle your debts. Federal law prohibits debt settlement companies from collecting fees before settling a debt, and the Consumer Financial Protection Bureau (CFPB) has filed lawsuits against companies that violate this practice.

Alex Beene, a financial literacy instructor at the University of Tennessee at Martin, notes,"Typically, any entity charging an upfront fee does so in order to lock in what they can get from the customer as quickly as possible and out of an understanding they may not be able to resolve the debt issues of the customer. Don't do it."

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Servicers don't provide a written agreement

If a company doesn't provide a written agreement breaking down the services they'll provide and what you can expect, they're probably not legitimate. Reputable companies are transparent and typically have a process to help reduce your debts.

"Avoid companies that do not provide clear, written information about fees, timelines or risks associated with their services," says Melissa A. Caro, a certified financial planner and financial literacy advocate. "Anyone who is vague or tries to apply pressure should be considered suspect. Legitimate services will provide all the necessary information upfront."

Servicers make lofty guarantees

The CFPB recommends avoiding any company that makes grand promises and guarantees, such as:

• Eliminating all of your debt
• Making debt collectors go away
• Reducing all of your debt for a fraction of what you owe

The reality is that debt settlement isn't a one-size-fits-all process. While a company can make every effort to negotiate with your creditors, they can't guarantee how a creditor or debt collector will respond. Any company that guarantees results is likely misleading you. By contrast, legitimate debt settlement firms will be upfront about the risks involved and won't make promises they can't keep. 

Servicers contact you unsolicited

Be wary of debt settlement companies that contact you unsolicited, especially through robocalls. There's a high probability companies relying on these aggressive tactics aren't legitimate. Too commonly, these scams prioritize high-pressure sales over a genuine focus to improve your financial well-being.

"One of the best tools a scammer has is fear," says certified financial planner Chris Cybulski at Chisholm Trail Financial Group. "If you're in debt and getting calls from creditors, you may not be in a great space mentally. When someone calls they can use fear to get you to act quickly or irrationally. Urgency is also a tool used by scammers. When you have to act now or this deal will fall apart, ask yourself if what they are promising is real."

The bottom line

Dealing with crippling credit card debt can be stressful and it's easy to fall for offers that sound too good to be true. Scammers know this and try to take advantage of unsuspecting debtors by making big promises they can't keep and charging high fees for negligible — if any — results. Learning to spot the warning signs can help you avoid being scammed and find honest companies that actively work to help you get your debt under control.