6 mistakes that can make debt relief more expensive

For millions of Americans, debt has become more than just a monthly budgetary concern. With credit card interest rates still hovering above 21% on average, inflation climbing back to 4.2% and household debt balances at record levels, carrying high-rate debt has become an increasingly common financial hurdle for borrowers, who are struggling to repay what they owe in today's tough economic climate. As a result, more people are turning to debt relief programs in hopes of reducing their balances and getting back on stable financial footing.

But enrolling in a debt relief program isn't a guarantee that you'll save money on what you owe. Like any financial strategy, the outcome of the debt relief process depends largely on how you approach it. Small decisions made before or during the debt relief process can have a significant impact on both the cost of the program and the amount of debt you ultimately eliminate. So, if you make the wrong decisions during that process, you could end up paying a lot more than you initially bargained for.

That doesn't mean debt relief isn't worth considering, mind you. For many borrowers, debt relief can be an effective alternative to staying in serious debt they can't afford or defaulting entirely on what's owed. However, you need to know what can drive up the cost of debt relief before you enroll.

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6 mistakes that can make debt relief more expensive

Avoiding these common mistakes can help you keep costs under control and improve your chances of a successful outcome:

Waiting too long to enroll 

Credit card interest accrues daily, not just at the end of a billing cycle. That means that every month spent shopping around for the right debt relief strategy, or every month spent hesitating or hoping for a rate cut, is another month of interest compounding on an already elevated balance. And, with the Fed holding rates steady so far this year and no meaningful relief for borrowers on the horizon, delaying enrollment in a debt relief program generally means paying more before the savings even begin.

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Skipping the fee comparison

If you're taking the debt settlement route, it's important to know that the fees aren't standardized. Depending on the company and state, the average fees range from 15% to 25%, meaning that the percentage can swing meaningfully on a five-figure balance. In turn, enrolling with the first company that returns a call rather than comparing fee structures and projected net savings across several providers is one of the most direct ways to overpay for the same basic service.

Defaulting to settlement without considering a different plan

The goal of debt settlement is to negotiate down what's owed, but it comes with a real cost and real credit damage. There are other potential routes, though, that come with much lower fees, like a debt management plan through a nonprofit credit counseling agency, which can still offer big relief by lowering your credit card interest rates dramatically. Choosing settlement automatically, without weighing whether another plan would resolve the debt for less, and with less credit damage, can mean paying for services that weren't actually necessary.

Continuing to add new debt during the program 

Enrolling in a debt relief program doesn't pause the habits that led to the balance in the first place. Continuing to charge purchases, especially on the credit cards that are not enrolled in the plan, adds new interest at the same elevated rates while the original debt is still being resolved — undermining the entire point of the program.

Falling for upfront fees 

Under federal rules, legitimate debt relief companies aren't permitted to charge settlement fees upfront before actually settling a debt. Any company asking for payment before delivering results is a red flag, and paying it is money spent with no corresponding progress toward debt reduction.

Overlooking the tax consequences of forgiven debt 

When a creditor forgives a portion of a balance through debt settlement (generally any amount over $600), that forgiven amount can be treated as taxable income by the IRS, and creditors are generally required to report it. Borrowers who don't plan for that tax bill in advance can be caught off guard by an unexpected liability when they file their taxes, adding an unbudgeted expense to what looked like a clean resolution.

The bottom line

Debt relief programs exist because the math on high-rate debt often doesn't work in a borrower's favor, especially with rates still elevated and no legislative cap in place. But the savings these programs promise aren't automatic. They depend on enrolling promptly, comparing fee structures, choosing the right type of program for the situation, avoiding new debt along the way, steering clear of companies charging illegal upfront fees and planning for the tax implications of any forgiven balance. Getting those details right is often what determines whether debt relief actually relieves anything.