You may have seen ads for debt consolidation and debt settlement and wondered if they are the same thing or if not, what the differences are. Let’s examine the two and see what the differences, if any, are.
Debt consolidation involves consolidating all of your debts into one monthly payment. When you go this route, you work with professionals who are able to negotiate with your creditors to get your interest rates lowered and late fees waived or lowered as well. Instead of having to juggle your bills each month because you can’t pay them all, you make one payment to the company you are working with and they distribute that payment among your creditors.
Since you are paying your bills, you can expect your credit score to go up. In addition, you will no longer receive calls from bill collectors and you won’t be getting any more steep late fees. Usually, after being in the program for several months, all of your financial obligations will be paid and you will then be debt free.
Debt settlement is quite different. You still work with a company who will negotiate with your creditors on your behalf but in this situation, the monthly payment you are making to the company goes into an account to be saved. When you have accumulated enough for the company to approach your creditors with a settlement offer, then some or all of your debts may be settled for less than you actually owe.
Typically, debt settlement does not improve your credit score because by settling your debts for less than you actually owe, your credit report will reflect this. In addition, while some creditors may settle for as much as 50% less than you actually owe, there is no guarantee that all of your creditors will be accommodating to this plan.
Finally, during the time that you are accumulating savings, you are still obligated to pay your creditors. In addition, during this process your creditors may still charge the same interest rates and late payment fees so you may be amassing even more debt during this time. Most people agree that debt consolidation is preferable to debt settlement.
As you can see, there are vast differences between the two methods of settling your financial obligations. You may want to talk to a credit counselor to see which method will work best for you. Keep in mind, however, that the higher your credit score is, the better chance you have for a brighter future.
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