Debt Consolidation vs Debt Settlement
Updated: Jul 28, 2022
Whether you have good credit or bad credit, the majority of people I know have some kind of debt.
Most people have also let that debt get out of hand. This is pretty normal, considering we live in the age of social media where everything is meant to entice us to “want it now”.
Believe it or not, all debt is not bad debt. There are certain things we need in life. Some of us, can pay cash for these large necessity items like a car or a house.
But the average American, can not!
So, to the average American, who, have let things get out of hand, like myself at one point in life, how do you get out of debt?
I mean BAD debt, the high interest rate, taking all your money each month, making it hard to catch a break, kind of debt.
What do you do about that?!
To get out of debt you have many choices, in this article I will discuss 3:
You can consolidate your debt through a debt consolidation company.
You can settle your debt by going with a debt settlement company, or
You could do both yourself.
Let's talk about what each of these things are and which one may be right for you.
What is a Debt Consolidation Company ?
A debt consolidation company is basically a company that takes all your debt: credit cards, medical bills, student loans, etc. and put them into one large loan.
The idea of this works for some people, because the new loan often has a lower interest rate than the loans they currently have. They end up paying lower monthly payments once everything is combined.
Others just feel better seeing one bill come out of their account instead of several bills being withdrawn.
Whichever reasons appeal to you, there are things to consider if you decide to take this route. According to Bankrate.com’s author Jerry Brown, there are pros and cons to debt consolidation.
I love the way Bosa Sokunbi, CEO of Clever Girl Finance sums it up in this YouTube video:
Should You Get a Debt Consolidation Loan?
Now, let’s compare debt settlement?
What is a Debt Settlement Company?
A debt settlement company is “a third-party company that will reach out to your creditors to negotiate a new repayment plan."
This repayment plan is designed to help pay less than the original payments.
With that being said……
Depending on the amount of the loan, most people can’t afford to pay a lump sum on all their debt. Also, you will have to pay a fee for their services as well.
Another thing you have to keep in mind when you decide to take this route, is you have to have the money right then and there.
Most debt settlement companies will tell you to not pay your creditors for a few months and pay them instead.
They will then put this money in a savings account for you and when they call to negotiate on your behalf, they pull the agreed upon amount out of that account.
Don’t get alarmed about your credit score, just like with debt consolidation, it will take a dive.
As your debt disappears, it will start to rise again. This is a good program if you are trying to buy a home and want to reduce your Debt-to-Income ratio.
It will also give your underwriter relief because you do not have this bad history of not paying bills on your credit report.
But before you do your happy dance!
Your underwriter may ask you why you needed to go with a debt consolidation or debt settlement company in the first place.
If they are doing their job right they will. So here is a third alternative………
DIY Debt Management !
Believe it or not you can do both these things yourself or you can create your own debt management plan.
To DIY debt consolidation and settlement:
You can consolidate your credit cards by applying for a lower interest rate credit card with balance transfer.
You can apply for a personal loan with a low interest rate, pay your debt off with that, then just payoff that one debt.
You can call to negotiate settlement options with your creditors.
However, if you don’t want to apply for another credit card because you have bad credit, negotiate a lower interest rate with the bank on the card your currently have.
You never know until you ask. Once you do this…….
Put yourself on a budget and come up with a financial plan to pay what you have consolidated and negotiated.
You can also create a debt management plan where you do not consolidate or settle. You just set a goal to pay more than the minimum on your bills and pay them off.
This way will not affect your credit in a negative way, at all!
Debt management may be the best route if you are really particular about your credit score. It is also the best if you are not willing to spend another dime of your hard earned money, paying someone to do this for you.
If you still don’t think you can tackle this alone, you can always consider a free credit counseling program.
Also, online there're many bloggers that offer completely free financial courses, I really enjoyed taking the course by Clever Girl Finance.
These are great for those who need some guidance when taking on this major task.
Whatever you choose, just know that you are not alone.
There are many people just like you. However, many have put in the work and broken free of their financial woes.