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Debt Consolidation vs. Debt Settlement vs. Debt Management Program

Founded in 1951, the National Foundation for Credit Counseling is the largest serving nonprofit financial counseling organization. Find various topics in this blog, including personal finance, credit counseling, housing, budgeting and student loan help. Click here to speak with an NFCC-certified Consumer Credit Counselor.

By Lauralynn Schueckler

Debt consolidation typically involves taking out a lower interest loan to pay off multiple high interest secured, or unsecured debts such as credit cards. The lowest interest rate consolidation loan is generally secured against the borrower’s assets such as a home or a car. Because credit card debts have such high interest rates, even an unsecured consolidation loan can significantly reduce the borrower’s monthly payment.

With so many people upside down on their mortgages these days, using your home may not be acceptable security. If you are in such a situation, there is no need to worry because many lenders are eager for your business, even if you have less than perfect credit. When selecting a potential lender do some very thorough research, and make sure that the terms of a consolidation loan are equitable and that the company is reputable.

Debt settlement appears to be far more risky than debt consolidation. Some experts who have studied the debt settlement model cannot even agree that it is legitimate. Using this approach can actually lower a borrower’s credit score by 65 to as much as 125 points. Even one missed or late payment can cause a negative credit mark to remain on the borrower’s credit history for up to 7 years.

Debt settlement companies can have many fees which can make a deal unattractive for both the borrower and the claimants. Upfront fees are not supported by the Federal Trade Commission, but debt settlement companies usually charge them anyway, or they tack on a huge fee when you are finished with the settlement. These companies have also been known to keep your money in their accounts, and wait until it’s a large enough sum to settle with the creditors. This is horrible because while they are collecting your money, they are not paying the creditors and those creditors will report to the credit bureaus that you are behind on payments, and may even send the account to a collection agency which could have a terrible effect on your credit report. Debt settlement is dangerous and has many pitfalls. It seems more like an approach that would add to financial difficulty rather than relieve it.

A debt management program is by far the safest and most reliable route to take. Certified credit counselors can assist you in creating a money-spending plan and a realistic budget to help you handle the money you have. When the repayment of bills has become too difficult some credit counseling companies may be able to offer a debt management program in cooperation with your creditors. If you agree to take part in a debt management program you will be setup within that agency’s computer system, and proposals will be sent out to your creditors. The creditors will then review and approve the proposals with the concessions discussed during the credit counseling session. 

With debt management programs you will be able to make one simple monthly payment to the credit counseling agency, which in turn will be disbursed automatically to your creditors in the agreed-upon amounts. You are paying your creditors back each month so there is no need to worry about late or missed payments. In a debt management program, late fees and over-the-limit fees are usually eliminated altogether. The credit counseling agency can usually reduce high interest rates as well to help you pay off the debt at a much faster pace.

If you are in a bad financial situation due to high interest unsecured debt, your first choice should be a debt management program offered by a nonprofit credit counseling agency. Make sure the credit counseling agency has a good reputation, and they are members of well-known accredited organizations. When all else fails there is bankruptcy, but that should always be a last resort.

Lauralynn Schueckler is the Online Marketing Specialist at Advantage Credit Counseling Service. She is the author for Advantage CCS’s Blog called Dollars & Sense. Advantage Credit Counseling Service is a member of the National Foundation for Credit Counseling.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.

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