Accumulating a large amount of debt often leads to the necessity of taking drastic actions to get back on track financially. In this situation, many people turn to credit counseling or debt settlement programs. While these programs are common and offer some similar benefits, the way that they go about it differs greatly.
What Is Credit Counseling?
Credit counseling is a service you can sign up for that will help you figure out your debt situation. In many cases, these credit counseling services are nonprofit organizations. Most of the time, credit counseling services will steer you toward a debt management plan that they manage. These plans involve negotiating a lower interest rate with your creditors and then making monthly payments until the debt is gone. You pay the credit counseling service one monthly payment, which includes a monthly surcharge, and then the counseling service pays your creditors for you.
What Is Debt Settlement?
Debt settlement is an option that you can do on your own or with the help of a debt settlement company. When you sign up with a debt settlement company, you show the company all of your debt accounts. The company then talks your creditors directly and negotiates a settlement on your behalf. You will pay less than the full amount that you owe, and the creditors will close out your account. The debt settlement company take a percentage of the amount that you settled as its fee.
Damage to Credit
One of the key differences between these two types of programs is in how they affect your credit. When you sign up for a debt management plan through a credit counseling service, it should not have a negative impact on your credit score. You may be unable to get credit while you are in the plan, but once the plan is complete, your score should not be hurt. By comparison, when you settle your debt, it can lower your credit score for each account that you settle.
Speed
Another difference between these two debt solutions is the amount of time that they take. With a debt settlement plan, you should be able to complete the process relatively quickly. As soon as you pay your creditors, they will close out your accounts and your debt will be gone. By comparison, when you use a debt management plan, it could take five years or more to pay off all of your debts. This strategy requires a little more patience to get out of debt.
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