The difference between Debt Settlement and Consumer Credit Counseling is how your creditors are paid. Another significant different in the programs is where you are in your debt management. Credit counseling typically works with you before your debt goes bad. A reputable debt settlement company should not take you as a client unless your credit is already delinquent.
What is Consumer Credit Counseling?
Consumer credit counselors analyze your total amount that you owe, your total monthly payments, and your monthly income. From this information they figure out a monthly payment that you can afford to pay. While the payment is something you can afford, it is also designed to make sure that your debt is paid off over a 3-5 year time frame. The debt that consumer credit counseling works with is credit cards, personal loans, car loans, etc.
The credit counselors negotiate with your creditors for reduced interest rates and fees while you are in the credit counseling plan. They might even get the total amount that you owe reduced, although this isn’t their primary function. You will make monthly payments to the credit counseling company and they will pay your creditors based on the payments that they get each creditor to accept on your behalf. Your job is to make your payments to the credit counseling company and their job is to make your payments and do the negotiating with your creditors. Stay out of negotiating.
Often, your credit can remain in relatively good standing as long as you keep making payments to the credit counseling company and they keep making payments to your creditors. It is a very bad idea to miss a payment as the creditors will jack your interest rates and hit you with fees for even just one monthly payment.
What is Debt Settlement?
Debt Settlement companies pay your creditors off one by one. For every month that you pay your debt settlement company your monthly payment you build up the money that the debt settlement company has to use to pay off your debt. Once you have enough to pay off a creditor, the debt settlement company will negotiate with your creditor to get them to accept a payoff. When the creditor accepts a payoff, the debt settlement company makes the payment from your account. You then have to keep making payments to the debt settlement company until you have enough money to pay off the next creditor. This process is repeated until your debt is paid off.
Make sure that along the way that you work with your debt settlement company to make sure that they get letters from your creditors that your credit has been paid. You will need these to fix your credit report. In fact, as soon as you get a letter from a creditor that one of your accounts is paid off, you’ll want to send that letter to the credit bureaus to have them update your credit report. If you do it this way, you will have less work to do when your settlement plan is over. This will help your credit rebound quicker.
The quicker your credit rebounds the quicker you can buy a home, get a car loan, and stop worrying about low credit scores.
