Latest posts by Kumiko Ehrmantraut (see all)
- Should I Go to Grad School? 5 Things to Consider First - February 25, 2021
Before I had all the personal finance knowledge I have now, I was a very irresponsible young woman. I paid no attention to money, had no clue about what a credit score was, and spent a lotof money I didn't have. Before I met my wonderful husband, I hit a point in my life where my money problems were completely unmanageable. I had racked up so much in credit card debt that I was only able to afford the minimum payments on all 7 of my credit cards.
All of my cards were maxed out and I was completely lost on how to fix the problem. I searched high & low for a solution and did what most young inexperienced kids do – I looked to the internet. I read all about how to consolidate debt, lower my interest rates, and how to complete a debt snowball action plan. For me, this wasn't good enough. I wanted something to fix the issue NOW! But like most of us know, debt is a problem that can not be solved overnight.
After many more nights of searching, I found a solution that claimed to erase all of my debt in as little as 1 year.
This solution was called Debt Settlement. For the sake of keeping names out of the equation, I will simply say I immediately called the debt settlement company. It started off as a series of phone calls with a representative. They gathered information on my specific situation and told me they could settle my debt with the credit card companies in a year. I was ecstatic!
I received my debt settlement package in the mail, quickly glanced it over, and threw it in my nightstand drawer. The representative told me to STOP paying the credit card companies and to pay them every month instead.
- Related: How to Create a Plan to Pay off Debt
They told me my monthly payment had to be $285/month. They would collect the money, essentially putting in a basket, and once I had enough money in the basket to settle they would pay off my debt for me. They then instructed me to call the credit card companies to let them know I was going through settlement and I was seizing payments.
I continued to make payments to the debt settlement company for a year and was surprised to find out they could not settle my debt in the time frame they had given to me. They were now saying that the credit card companies needed more money to settle.
This went on for 1 more year before I finally received a notice that they were ready to settle my debts. After I received notices from the credit card companies that my accounts were settled, I started to receive letters from them informing me of the impact on my credit score. I was SHOCKED. I had no clue that debt settlement stays on your credit report for 7 years. I was also not aware that I would be getting a 1099-C tax form. This form is used when a part or all of your debt is canceled (settled) in some way – I will explain the consequences of this form below.
So you see, my first mistake was accumulating credit card debt to a point where I felt desperate for help. My second mistake was falling victim to a solution that promised to fix things in a short amount of time.
I want you to be aware, and informed of these mistakes. Know the real money drainers that exist. The ones that seem to hide in plain sight and make you believe that they can fix your money problems. Talk to your children about these hidden money drainers. Don't let them repeat the same mistakes I did. These mistakes were made in 2008 and I finally just got them removed from my credit report.
MONEY DRAINERS TO AVOID
Debt Settlement
This has many names such as debt negotiation, debt arbitration, or credit settlement. This option for getting rid of your debt should be avoided at all costs. The consequences of debt settlement are extreme. It is not a solution that is FREE! You will pay dearly on your credit score and the taxes and fees you will pay for the debt settlement can easily cost you more that what you save from settling.
- During the time you are making the payments to the settlement company, instead of the creditors you owe, they can actually take legal action against you. This can lead to them garnishing your wages, and even putting a lien on your personal property.
- Since your payment history makes up for at least 35% of your credit score, not paying your creditors so you can pay the settlement companies, affects your credit score negatively, Every payment you miss to the creditors you owe, is a negative mark on your credit score. So, using my situation as an example, that's 2 years of negative marks on my credit score. You may also be forced to pay taxes on the difference between what you actually owed, and what you settled for. The IRS sees this as taxable income because it is money owed that you never paid. You will receive a 1099-c if the settlement amount was greater than $600.
- It can also lead to a higher volume of collection calls. This only adds to your stress.
- There are 3 ways that settlement companies impose fees. What I want you to remember, is that the higher the fee, the longer it will take for you to settle your debt. So the money you are giving them to put in the “basket” for you, they take a fee for offering you their services. Remember, debt settlement comes with a huge price.
Rent-to-Own
This is a multi-billion dollar industry and is one of the main money drainers hiding in plain sight. You see them all the time. On street corners, across from your local Macy's, and maybe even down the street from your house. These are attractive to many buyers since it allows them to make huge purchases, without paying the huge upfront cost. The most attractive features of Rent-to-Own stores is that no credit is extended, credit reports are not obtained, and renters can simply pay as they go. Seems to good to be true, right? Let me tell you of what is really going on.
- The most popular Rent-to-Own purchase is furniture/electronics. When you walk into a Rent-to-Own store and buy a 70″ TV, you may not realize the real price you just paid for that gigantic television. Most buyers make these purchases, thinking they can pay a small monthly payment, and walk away with the goods. The longer term you have to make payments means you could easily pay double to triple the price of what that TV actually costs. You have to figure in interest rates.
- You are probably thinking, “Kumiko, you just said Rent-to-Own purchases are not loans, so there should be no interest payments.” Let me give you an example of what I mean when I say interest rates. Say you walk into a Rent-t0-Own electronic store. You buy a laptop computer that retails for $612. You have arrangements to pay $38.99 every week for 48 weeks. This totals out to be $1871.52, which excludes sales charges and other imposed fees. That means you just bought a laptop that retails for $612 and financed it with 300% interest.
- One missed payment and they can seize the asset you just purchased.
- They are good at making you buy items you don't need, by giving you low monthly payments. This can lead to unmanageable debt payments.
- If you decide to return the product you bought, you will pay a hefty fee to do so.
Other Money Drainers to Avoid…
- Cash Checking Operations – They will charge you a fee based on the face amount of the check, plus a transaction fee if the check is over $20
- Predatory Lending – Don't be a victim of predatory lending. To read more about this topic please read Predatory Lending – What Consumers Should Know
Do you have money mistakes that you regret?
I totally agree with your assessment on which ones are money drainers to avoid. I particularly like what you said on debt settlement or whatever it’s called. I believe that when you go into a debt settlement, the damages have already been done. By then, your credit score has taken a hit and your borrowing power has diminished dramatically.
Thanks for the comment!
Really good advice on money drainers! Also a really good example of how there is always fine print! Thank you for posting this!
Yes, always be aware of the fine print:-) Thanks for the comment!
What a story about the ‘service’ to for debt settlement. They prey on the most vulnerable. Enjoying reading your story.
Thank you!