Debt collectors send inviting offers to some debtors and actually offer you a credit card that you can use to pay off your old debt – normally credit card debt.
This scam works because many people believe they are doing the right thing by paying their old debts. The scam is similar to a pyramid scheme, and the debt collector is using other people’s money.
Perhaps you owed $1000 when you quit paying your old credit card bill. The debt collector paid $95 for the account. Look at the balance the collector says you owe. Let’s assume it is now around $1495
Now look at the interest rate on your “new credit card” and you will see it is probably near the maximum allowed by law, but at least 29 percent.
Consider how long the debt has been in a charge off status. Are you near the statue of limitations for your state? Would the debt drop off of your credit report any time soon? Consider these questions.
The scam works because normally you did not receive the offer by certified mail. The collector doesn’t even know if you received the mail. But once you respond they know how to start the pyramid scheme.
Issuing a credit card to someone who defaulted on a credit card in the past seems like risky business. In real life the new debt will be packed into asset back receivables, sold on the bond market as if it a regular credit card receivable, and the risk to the issuer is diluted.
You might be charged $100 to $300 for your new card, plus high interest, and it serves no purpose other than paying off an old card. Thus the pyramid scheme.
The collector knows where you are, and the fine print says you have no recourse and cannot sue. Everyone makes money on the deal, and your payments will be very high. They expect you to make the minimum monthly payment. These companies often call your home every day, sometimes more than once a day, around the time the payment is due.