What Is the Difference Between a Debt Settlement Company & Credit Counseling?

Consumers who are struggling with debt or other financial concerns have a number of options for assistance. Two of the more popular choices are debt settlement companies and credit counseling. While both work to help solve financial problems, there are a number of differences between the two that consumers should understand before beginning services.

Cost

Credit counselors typically work for nonprofit agencies. These counselors charge a low monthly fee -- about $25 -- or no fee for their services. Fees charged by debt settlement companies will vary widely, but the fees are typically much higher than credit counseling. Debt settlement companies often ask consumers to send them monthly payments. The debt settlement company then holds the payment in an account and does not promptly send the payment to the creditor. Once the account builds up, the settlement company then offers a lump sum payment to the creditor. During this time, creditors often charge significant fees and penalties to the account, potentially adding cost to the consumer.

Credit Impact

By withholding payments to creditors, a debt settlement company damages a consumer's credit score. Debt settlement companies also negotiate settlement amounts for debts. This settlement of debt will negatively impact a consumer's credit score. Credit counseling typically does not negatively impact a consumer's credit score, as the consumer still pays the entire debt amount, though creditors often agree to reduce interest rates or accept smaller monthly payments. As many consumers seeking assistance may already have damaged credit, the impact of the debt settlement may be less of a burden than the debt itself.

Education

Debt settlement companies typically do all of the work for the consumer. Conversely, consumers often take an active role in credit counseling, including an educational component. Though the credit counselor will deal will creditors, credit counselors may require consumers to attend educational classes on a variety of financial topics. Credit counseling helps consumers to gain the needed skills to avoid getting back into debt and to plan for their financial future.

Fraud

Many groups and individuals have been very critical of the practices and fees charge by debt settlement companies and many of these companies have even been the target of lawsuits by the attorneys general of various states. Credit counselors that are members of the National Foundation for Credit Counseling have a better reputation for quality services. Many of these credit counselors receive referrals from bankruptcy courts and the Department of Housing and Urban Development. Before choosing any service to assist with financial problems, consumers should check for complaints with the Better Business Bureau, their state's attorney general and other sources.