Credit Counseling vs. Debt Settlement

If you are considering credit counseling, debt settlement is usually also an option. When you have debt problems, there is a good chance that you will require some help. However, you may not know whether to choose credit counseling or debt settlement. Here are the basics of both options and whether you should work with either one.

Credit Counseling

The basis of a credit counseling program centers around debt management. Credit counseling services seek to help you work with the debt that you have and pay it off in time. There are many credit counseling programs out there and they all differ a bit. However, the basic plan that they offer is usually the same. 

When you are deep in debt, there is a good chance that you have multiple accounts with balances. You may have three or four credit cards, some store accounts and medical bills. Making all of these payments can be overwhelming at times. Many people can not even afford to make the minimum payments on their credit cards.A credit counseling program can help you take control of your bad situation. 

A credit counseling program will help you start a debt management plan. They will contact all of your creditors on your behalf and negotiate a plan for you. They will typically get your interest rate reduced as long as you agree to the terms of the plan. You will have to close your credit accounts and agree not to open any other accounts. You will then have one monthly debt payment deducted out of your bank account by the credit counseling service. They will make all of your payments for you and collect a monthly service fee for doing so. 

This type of program will negatively affect your credit. However, if you have been making late payments or missing payments, it can actually benefit you. It will get you on a regular payment plan over a long period of time, which actually helps your credit score.

Debt Settlement

Debt settlement is another way to eliminate your debt problems. However, it takes place in a much shorter period of time than working with a credit counseling program. With this type of program, you will negotiate a settlement with a creditor. For example, let's say that you have a credit card with a $5000 balance on it. You have come across hard times and you can not afford to make your payments. You miss several payments in a row. They turn you over to a collections agency and start to contact you about getting payment. 

At that point, they may be willing to take less money than what you owe as a settlement. They tell you that they will take $3000 and close out the account. If you were suddenly to come across a lump sum of money, like getting a tax refund, you could take the deal and save yourself $2000. The drawback to this approach is that your credit score will be negatively affected.