Money Talk - Digging out of a credit card trap

Dear Liz: Last year my credit card rates averaged 7.9%. Today they average 29.9%! Because of job downsizing, I could not make two months of payments, so my credit card companies really socked it to me. My monthly minimums jumped from $200 to $2,000.

I have given up trying to salvage my once-excellent credit rating. Now all I am hoping to do is stop the $39 late and over-limit fees that get added on as "purchases" (and that get charged the outrageous interest). I also would like to stop the incessant phone calls (12 to 15 a day).

It seems like the companies are trying to force me into bankruptcy. I don't know where to turn. I can see that a credit card settlement service company is an alternative, but how do I know whom I can trust to negotiate with the creditors and follow through with the distribution of money? Do I try to do it myself? If I do succeed in "settling" for some lower amount, don't I have to pay income taxes on the amount saved? It seems like an impossible trap.

Answer: You're in a trap, all right, but it's largely one of your own making.

Carrying balances on your credit cards is a terrible idea. It encourages you to live beyond your means and leaves you vulnerable to sudden increases in your interest rates or minimum payments.

You need to get on track. Can you cut expenses or land a second job that would enable you to pay these bills?

If not, and you can't even pay the minimums, you should talk to two professionals: a counselor with a legitimate nonprofit credit counseling agency, preferably one affiliated with the National Foundation for Credit Counseling, and an experienced bankruptcy attorney.

Credit counselors' agreements with card companies allow them to offer repayment plans at lower interest rates. But the counselors could steer you away from bankruptcy, even if that might be the best option for you. Bankruptcy attorneys, by contrast, might be inclined to steer you to court. Consulting both will ensure you get a balanced picture of your options.

Trying to settle your debt for less than what you owe is fraught with peril:

Debt settlement firms tend to charge high, often hidden fees and can offer no guarantees of success (if they do offer guarantees, that's a sign to steer clear).

You're likely to do further damage to what's left of your credit scores.