Debt Settlement vs. Debt Consolidation Is There a Difference?
Debt settlement and debt consolidation are not the same thing. Although both help reduce your debt, they each affect your credit score and wallet differently. Before registering with a debt management company, make sure you understand the pros and cons of their approach. And of course, be a smart shopper before signing any contract.
Debt Settlement Instantly Eliminates Debt at Cost
Debt settlement companies make your creditors immediately write off some of your debt. Worried that you are broke and they don’t see the money, creditors will reduce your debt. With smaller payments, you can more easily delete your principal.
But with debt settlement, your credit will be in bad condition for several years. Debt settlement is treated like a foreclosure or bankruptcy by a lender. So it will be difficult to get decent credit, for at least two years. You will also have a tax liability with the amount removed.
Debt Consolidation A Slow Approach To Relieve Debt
Debt consolidation companies handle your creditors and payments. You send them one payment, from which they pay your account. They also negotiate lower prices with your creditors, helping you get out of debt faster.
With this approach, your creditors will temporarily freeze access to new credit. They will want to see in the next year that you make regular payments and reduce your debt. Your credit score can also go down, depending on whether your lender reports that you are working with a debt consolidation company. But after one year, you will be able to apply for new credit, perhaps at an initial price.
Research Before You Enter
Before you register with a debt management company, make sure you research several companies before deciding. Ask about their costs and processes. Comparison shopping will give you a good idea of how reasonable it will cost. Details about the process will tell if the company is experienced in this type of debt management.
The faster you reduce debt, the faster you increase your credit and financial scores. Debt management companies can help you get started.