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Debt Consolidation or Credit Counseling?

Being up to your neck in debt just isn’t any fun. In fact, it can just about ruin your life. The stress of trying to keep up with just your minimum payments can actually have an adverse effect on your health. There is an old saying that “stress kills,” and it can actually be true. So with that in mind we will talk about two of the popular ways to get out of debt – debt consolidation and credit counseling.

The good news about drowning in debt…

There is some good news about being heavily in debt. It is that there are ways to get help. The three most common of these are called credit counseling, debt consolidation and bankruptcy debt relief.too much debt causes problems

The pros and cons of credit counseling

You may have seen television ads or heard radio commercials about a service called consumer credit counseling. This is where you find a credit-counseling agency to help you with your debts using a debt management plan. Most of these agencies are nonprofits and offer their services free. Why free? It’s because creditor companies such as banks and credit card companies underwrite their costs. They’ve learned that it’s better for them to help you manage your debts than see you declare bankruptcy.

The upside of credit counseling

There are some good things about credit counseling. Your credit counselor will work with you to develop a payment plan and then negotiate with your creditors to have them to accept it. You will probably have five years to pay off your debt and all your unsecured debts will be consolidated into one monthly payment. This program is commonly called a debt management plan or DMP.

The downsides

Unfortunately, there are some negatives to consumer credit counseling. One of the largest of these is that not all creditors subscribe to the program. Some of the larger banks such as Bank of America may not be in the program, which means you would still have to deal with them separately.

Your credit score can be affected

Credit counseling will adversely affect your credit score. Without going into all the technical details, the problem is that all your debts will be handled by the credit counseling service, which is a third-party. Your credit cards will be closed, which means the amount of your available credit will go to zero. The credit reporting bureaus use this as a major part in computing your credit score, so it will have a negative effect on it.

Your monthly payment may not be reduced

Finally, the consolidated payment you will be making to the credit counseling service will be very similar to the total of your current minimum monthly payments. What I mean by this is that if the total of the minimum monthly payments on your debts is $1,500, your consolidated monthly payment is likely to be at least  $1,500 or even slightly more. This means that if your objective is to reduce your monthly payments, credit counseling will not help you achieve it.

climb out of debtWhy debt settlement might be better

Debt consolidation using debt settlement can be a better alternative than credit counseling because it can be used to actually reduce your debts. The way it works is that the debt settlement company negotiates a settlement with your creditors, usually for a fraction of what you owe. Instead of paying your creditors you send the money to the debt settlement company, which puts it in a trust in your name. The largest percentage of this money is eventually used to pay your creditors–based on the settlement that was negotiated for you–while a small percentage is retained by the debt settlement company as compensation for its services.

Get out of debt faster

It might take you as long as five years to become debt-free using a consumer credit counseling service. However, you should be able to get debt-free in as few as 24 to 48 months using debt settlement.

You pay nothing up front

You do have to be careful about choosing a debt settlement company, as there are some scam artists out there. You could send money to one of them for months and then discover that they were just keeping it and not paying your creditors. If debt settlement appeals to you, be sure to do your homework and choose a company that’s both reliable and ethical. For example, National Debt Relief charges nothing upfront. In fact, you pay nothing until you approve the payment plan it negotiates for you. Its fees are then taken out of the money you’ve deposited in your trust account.

The one negative of debt settlement

There is one negative to debt settlement and that is that it will have an effect on your credit score. You just can’t stop making payments on your debts for 5 to 6 months without it negatively impacting your credit report. However, it will not have as serious an effect as filing for bankruptcy, which can stay in your credit report for as along as seven to 10 years. In fact, you can recover from settling your debts relatively quickly.

Debt settlement is not for everyone

Even though National Debt Relief is a debt settlement company, we will be one of the first ones to tell you that negotiating and settling with your creditors may not be the best choice for everyone. Not everyone has the financial resources to save up for the eventual settlements.get debt relief help Not everyone wants to hurt their credit score in any way even though the future benefits outweigh the short term costs.

Take a few moments and give us a call and discuss your options with no obligation.

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