Which Is Best: Credit Counseling or Debt Relief?

You may be hearing lots of promises coming from debt relief advertisements, offering to obliterate any negative information on your credit report and to slash the balances on your debt. However, oftentimes, debt relief companies carry numerous hidden fees, or worse yet, are just plain scams. Credit counseling is the safer alternative, offering realistic advice to help you to get back on the road to financial freedom.

Credit Counseling

Credit counselors do more than set you up with a debt management plan; they help you to understand why you're having financial problems, and then work with you to create a budget to avoid getting into dire financial straits in the future. If you are behind on payments to creditors, a credit counselor may then recommend that you enroll in a DMP. Under a DMP, your credit counselor will work with your creditors to negotiate lower rates and/or a lower payoff balance. To find a legitimate credit counseling company, the Federal Trade Commission recommends checking with your state Attorney General and the Better Business Bureau.

Debt Relief

Debt negotiation companies, often called debt relief companies, focus only on negotiating lower payoff balances with your creditors. The Federal Trade Commission warns that claims made by most credit negotiation companies do not line up with their actual services, and that there are many scams that lead to even lower credit scores and higher debt. Most debt relief companies also require that you pay high fees for their services.

Warnings

Because of the many debt relief and debt negotiation company scams, it's vital that you look into your other options before signing on with one. Even if a debt negotiation company advertises itself as being a nonprofit, it may not be legitimate. If the company tells you to stop making payments to and communicating with your creditors, and that they can erase any negative information from your credit report, the Federal Trade Commission recommends that you steer clear.

Considerations

If you enroll in a DMP, make sure to ask your credit counselors about the time frame for the plan. Also, make sure you can afford the monthly payments; if you fall behind on a DMP, it will reflect poorly on your credit report. Look into all of your other options before agreeing to a DMP. You may ask your creditors for a lower interest rate on your current credit or take out a consolidation loan. While a DMP doesn't affect your credit score directly, you may have trouble qualifying for loans while it appears on your credit report, for up to seven years.