InvestingUnderstand Debt Settlement, Debt Consolidation & Credit Counseling
Nearly everyone that is presently being dragged under by debt has tried using their credit cards less, and has tried making higher monthly payments than the requested ones, only to see their level of debt increase rather than decrease.
The next stage is to try some sort of system that they've read about, and if they're lucky enough to find one that works for them, then they may eventually get debt free, after a number of years.
If the debt is simply too big and the interest too high, then the debtor's thoughts eventually turn to credit counseling, debt settlement, debt consolidation and even bankruptcy.
Bankruptcy is something that is most often left until last however, because it's generally viewed as an option that will always be there if all else fails. It should be noted however that for some people, and in certain circumstances that it is something that should be done sooner rather than later.
Most people have some idea of what credit counseling means, but they often think it's little more than sitting down and getting some tips from a friendly counselor, but it's much more than that.
How Does A Credit Counseling Service Help?
A good one will,
a) Negotiate a lower interest rate.
b) Set up a repayment plan.
c) Show you how to reduce expenses.
In a great many cases, the credit counselor should be able to reduce a monthly payment of $800 - $900 to around $550.
How Much Does Credit Counseling Cost?
The first meeting should be free, followed by a monthly charge of around $35 per month to cover operating expenses.
What's Different About Debt Consolidation?
Debt consolidation is completely different, and its goal is to combine all your individual debts into just one, that will have a lower interest rate than all the others combined, with only one set of charges, and one monthly payment.
Please note that debt consolidation is really only viable if your credit rating is still in good shape, or you have a home or something similar to use as collateral.
A good debt consolidation agency should,
a) Carry out all the negotiations, thereby removing a lot of the stress.
b) Get you the very best interest rate.
c) Arrange just one monthly charge.
d) Stop all the harassment.
So How Does Debt Settlement Work?
Debt settlement in essence means that the creditor and debtor agree to new loan terms that are more favorable to the borrower.
The creditor has to be persuaded that it's in its interest to do so, and that refusing to cooperate will result in the debtor declaring bankruptcy, which is the last thing that the creditor wants.
The negotiations are not for the faint-hearted, and they are also very time consuming because many times a deal that was agreed to in principle has to be renegotiated several times.
The reason for the continual renegotiation is because in almost every case, several creditors are involved and they have no interest in deals that are being made with their competitors.
So the final deals can only be sealed and signed, when there is a deal with every creditor that the debtor will be able to live with.
All of the above will damage your credit rating to some extent, and the degree to which it will be damaged will mostly depend on how it is rated when you enter into the negotiations.
If your credit rating has already been shot to pieces, then it should scarcely be affected, whereas one that is excellent will be affected the most.
In theory, if debt consolidation is done right, it should not damage your credit rating at all, as it is in essence using a home equity loan to pay off other debts, but it does mean taking out a new loan, and a restructuring of debts, which credit rating agencies don't like to see,
We mentioned above the need to have a good agent handle your affairs, and that is because there are many flakes out there, and there number is increasing because real estate agents and others that were left without gainful employment due to the recession have entered an arena that they know next to nothing about.
Nobody wants to deny them a living, but it shouldn't be at your expense.
The bottom line is that should only go to a BBB (Better Business Bureau) affiliated agency, and make sure that you understand what you're signing.
Have the contract repeated and explained until you understand it completely, even at the risk of appearing a dummy!
Getting free from debt will always be a positive move, so regardless of which option you choose, do it sooner rather than later.