If you’re looking for a solution to your debt, you’ve probably come across credit counseling as an alternative. When it comes to debt, there is no one-size-fits-all solution. Credit counseling may be an option for some people and debt settlement may be a viable alternative for others.
What is Credit Counseling?
Credit counseling is a service that can help you manage your credit card payments. They can often help lower your monthly payment by working with credit card issuers to lower your credit card interest rates. Generally, credit card issuers already have a set interest rate that they’ll give to consumers who work with credit counselors, so these agencies don’t necessarily have to negotiate a lower interest rate for you.
Once you’re signed up, the credit counselor will likely put you on a debt management plan through which you make regular monthly payments to them and they, in turn, send your payments to the creditor.
It can often take three to five years, and sometimes more, to completely pay off your debts while you’re on a credit counseling’s debt management plan. In the meantime, you usually can’t use the applicable credit card and you’re discouraged from opening new credit card accounts. The fact that you’re on a debt management program is typically listed on your credit report. While the latest credit scoring formulas don’t penalize you for credit counseling, lenders may still view the mark negatively.
How Debt Settlement Differs
Debt settlement is very different from credit counseling. Many people who pursue debt settlement would most likely otherwise have filed bankruptcy because they cannot afford their monthly credit card payments. If the monthly payment for credit counseling is still more than you can afford to pay, debt settlement may be the option.
Through debt settlement, you hope to eliminate your debt responsibility within two years or less. This time period is typically much less than the time period it takes to pay off your debt through a debt management plan. Debt settlement has fees if you use a settlement company, but these fees are somewhat offset because you typically stop paying your debts and instead start saving your debt payments so they can be used to make a settlement payment.
The way debt settlement is listed on your credit report can negatively impact your credit score. But you can work on rebuilding your credit score after you’ve settled your debt.
If you are having a short-term problem making debt payments and you can afford the monthly payment under a debt management plan, credit counseling may be a better option for you. Many people just need a few months to get their finances under control and then they can resume making regular payments on their debt.
However, if your problem goes beyond short-term, if your debt is overwhelming and your monthly payments under a credit counseling program are unaffordable, you should at least consider debt settlement. Even in a settlement program, you probably need to be able to put some money aside each month that can be used to settle your debt when the creditor or collector agrees to the settlement. However, if you can’t even afford to put some money aside to save up for a settlement offer, you may need to consider bankruptcy.