Debt Settlement Vs. Debt Consolidation
by: Carrie Reeder
Debt settlement and debt consolidation both
offer ways of reducing your debt. Debt settlement eliminates part of your
loans, while debt consolidation reduces interest rates. Even though debt
consolidation has the least impact on your credit score, there are cases
when debt settlement is a better option.
Lower Debt
The goal of both debt settlement and debt
consolidation is to lower your debt. Debt settlement companies negotiate
with your creditors to sometimes reduce the amount of your loans. You will
be charged a fee, and the debt reduction will remain on your credit score
for seven years.
Debt settlement can reduce your debt 10% to
50%. To get the most out of the program, pay off the rest of your debt as
soon as possible. Also, close accounts that you don’t plan on using
to raise your credit score.
Debt consolidation pays off your high interest
debts with a low interest loan. Home equity loans provide the lowest rates,
but personal loans can also be used. With rates lower on your debt, you can
pay off the principal sooner by making the same monthly payments.
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Credit Score Implication
Reducing your loans through debt settlement
is a serious mark to creditors. You credit score will drop, making you ineligible
for conventional loans. But you can apply for subprime credit after a year.
After a couple of years of good credit habits, you can then apply for lower
rate conventional loans.
Taking out a loan to consolidate your debt will
have a slight impact on your credit. Since your debt isn’t actually
increasing, you will only be hit for opening another account. By closing
your paid off accounts, you can partially offset the penalty. In a short
period though, you will be in good credit standing if you follow best practices
with your credit.
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Financial Choices
No one financial choice fits everyone’s
needs. While debt consolidation has the least affect on your credit report,
additional loans may be too expensive. In extreme cases, debt settlement
can help to avoid bankruptcy. Before deciding on an option, look at what
companies are offering in terms of rates and fees. And if you need additional
advice, talk to a credit counselor who can take a look at your finances and
offer suggestions.
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