Trying to tackle credit card debt before the holidays? Beware of relief scams
As the holiday shopping season kicks into high gear, a recent NerdWallet survey shows more than a quarter of Americans are still paying off presents they bought last year.
It comes as credit card debt levels have reached record highs, according to the latest household debt report from the Federal Reserve Bank of New York. Americans now hold a staggering $1.17 trillion in credit card debt.
Holding that debt is now more expensive than ever, too, with average interest rates hovering around 23%.
But if you're looking for help paying it off, financial experts warn some relief offers could wind up costing you even more if you're not careful.
Kim Rogers with ClariFi, a Philadelphia nonprofit that provides money management and credit counseling services, said the industry is rife with scammers.
Agencies charging upfront fees before offering services or employing pushy sales tactics could signal a scam, according to Rogers. She also warns to be wary of big claims that guarantee to eliminate your debts.
"Be careful of those kinds of too-good-to-be-true promises," Rogers said. "It can be a very scary place when the creditors are calling when you know you don't have the money to be able to afford those debt obligations each month and it can put you in a place of vulnerability."
Other red flags that a credit repair company could be a scam are if it tries to look like a government program, promises to erase your bad credit or remove information from your credit reports, or fails to explain your legal rights, according to the Better Business Bureau (BBB) and the Federal Trade Commission (FTC).
Legitimate debt relief comes in many forms:
- Debt consolidation combines multiple debts into one loan, usually with a lower interest rate, but often requires a good credit score making it difficult for individuals with a high debt-to-income ratio to qualify, Rogers explained.
- Debt settlement involves negotiating a lower payoff amount with creditors, but it's an option that often comes at a higher risk, according to Rogers. Those who choose settlement risk incurring expensive fees from late and interest penalties, according to the Consumer Financial Protection Bureau (CFPB), as debt settlement companies typically encourage you to stop paying your bills.
- Debt counseling is offered by nonprofit agencies like ClariFi or Money Management International. They work with your creditors to structure repayments at reduced interest rates within a set time frame. The U.S. Department of Justice lists credit counseling agencies for individuals seeking assistance.
- Balance transfers can allow you to transfer high-interest balances to a new card with no interest, but only for a certain period of time. Balance transfers are generally better for people who have good credit and often come with a fee, based on a percentage of the amount transferred.
Jamie Parker knows first-hand how quickly debt can snowball after she was hit with a one-two punch during the pandemic.
"I was laid off three times in three years and I was not prepared for that," the Montgomery County, Pennsylvania mother told CBS News Philadelphia. "I was a single mom of two kids, we had just gotten divorced, and I had a really tough time finding a job in the marketing industry."
Parker racked up more than $60,000 in credit card debt trying to make ends meet and keep her family afloat.
"It just kept downward spiraling, and the interest payments started creeping up," she said.
Ultimately Parker took action, choosing the counseling route where she managed to work with her creditors to lower her average interest rate from more than 20% to just under 1%.
She's now on track to pay it off in five years. She said she's determined to share her story to let others know they're not alone.
"I'm in a much better place, I feel like I can handle things," Parker told CBS News Philadelphia. "I want people to realize there's no shame in carrying a debt around when you've had no choice but to do that."
