Jul 25, 2024
Credit Counseling vs. Debt Settlement: What’s the Difference?
When dealing with significant debt, two common solutions are credit counseling and debt settlement. While both aim to help consumers manage their financial burdens, they function very differently. Understanding the distinction between the two can help you make a more informed decision about which route is best for your situation.
Credit Counseling Overview
Credit counseling focuses on providing financial education and structured repayment plans. A certified credit counselor works with you to develop a budget and, if necessary, sets up a Debt Management Plan (DMP) to help pay off your debts over time.
Debt Settlement Overview
Debt settlement involves negotiating with creditors to reduce the total amount owed. Typically, a debt settlement company will ask you to stop making payments to creditors and instead make deposits into an escrow account. Once enough funds are saved, the company will negotiate a lump-sum payment, usually for less than the total amount owed.
Key Differences
- Impact on Credit Score: Credit counseling has a minimal effect on your credit score, whereas debt settlement can severely damage your credit score as missed payments are often part of the process.
- Cost: Credit counseling is generally more affordable, often offered by nonprofit organizations at low or no cost. Debt settlement companies charge significant fees, which can be a percentage of the amount saved.
- Time Frame: Credit counseling typically takes three to five years to pay off debts, while debt settlement may offer faster relief but comes with greater risks.
Both credit counseling and debt settlement offer ways to address overwhelming debt, but they come with different risks and benefits. Credit counseling is a safer, more structured approach, while debt settlement offers the potential for greater savings but with higher risks.
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