Two of the most common forms of debt relief are debt settlement and credit counseling, sometimes referred to as debt counseling. While many people have heard of these debt relief methods most do not know what they are or what the differences between the two are. I often get asked which is better between the two. In this article I will explain what both are and how they are different. As for which is better it really depends on the situation that you are in. After reading this article you will have a much better understanding of the two, which will help you to see which solution might be best for you.
What Is Credit Counseling?
Lets start off with credit counseling. A credit counseling program has a few very positive benefits. The main benefit is that of getting your interest rate reduced, this varies from creditor to creditor; however it will usually be lower than what your previous interest was. The second benefit comes from having only one monthly payment to make. You make the payment to the credit counseling company and they disperse it to the creditors for you. Finally, on a credit counseling program you will get out of debt much faster than if you just stuck out the minimum payments, because you are now going to make a fixed payment for the duration of the program. The fixed payment really helps to speed up the re-payment process.
Many credit counseling companies advertise that they can cut your payments down. In reality things are a little different. In most cases what you will pay for credit counseling is going to be very close to what you were paying before on your minimums. The payments might be a little bit lower because of a reduction in the interest rate, but usually they are close to the minimums. One last thing you should know about credit counseling is there is about a 75% failure rate of people enrolled in these programs. The reason for this is because the credit card companies have the right to kick you out of the program if you miss just one payment.
What Is Debt Settlement?
Debt settlement is process where an agreement is reached to reduce the actual balance that you owe, not the interest rate. With debt settlement your account must go into default before the creditor will even consider negotiating on a reduced balance. There are just like credit counseling some very positive benefits about debt settlement. First being the amount of money you pay back is far less than what the balance is, so you save quite a bit of money. So naturally the fact that your paying back less would mean that you get out of debt quicker as well. Debt settlement is one of the fastest debt relief methods, usually taking no more than two years to complete.
There are however a few down sides to debt settlement. While you are in the program you will have a temporary reduction in your credit score, due to the derogatory remarks made on your credit report from falling behind. Plus there always is the potential of being sued. The good news is that the vast majority of people do not get sued, however it still is a possibility. Plus the damage that is done to your credit report is not permanent and is very fixable.
So What Are The Major Differences?
The number one difference between debt settlement and credit counseling is the savings. With credit counseling you usually end up paying back between 120-125% of what your current balance is, remember even though the interest is reduced it is still there. With debt settlement you can look to save anywhere from 40-60% of what you owe, which is a very big difference from 120%. You also get out of debt much faster with debt settlement than credit counseling. Like I said earlier debt settlement should take two years no more than three, while credit counseling can take five years or more. Another major difference is your payment status, with credit counseling you are still reported as current, with settlement you must go into default.
So Which Is Better For You?
This really boils down to your particular financial situation. For someone who has 10k in debt or more and is having trouble staying current than settlement would be better. If your debt situation really isn’t that bad and you aren’t really having problems staying current than credit counseling is better. If you plan on credit counseling be sure that your job or income stream is very steady. Like I said earlier going as much as one month behind can mean you getting kicked off the program.
It comes down to what you really want. If you want to save money and get out of debt as quick as you can then debt settlement is for you. If you are just looking to consolidate all of your monthly credit card bills into one and have the interest reduced than credit counseling is more for you. Either way both methods come with their respective pro’s and con’s. The worst thing to do is nothing and to continue making minimum payments, which will mean years of being in debt and thousands lost to interest. I wish the best of luck to whomever reads this, with whatever method you end up deciding, and I hope this article gave you a little bit more knowledge to help you make your decision.
Steve Martin is a debt analyst for the USCA/Roll Law Firm. Which offers credit card debt settlement services.