What is the difference between a credit counselor and a debt settlement company?
Credit counseling organizations are usually non-profit organizations that advise you on managing your money and debts and usually offer free educational materials and workshops. Debt settlement companies offer to arrange settlements of your debts with creditors or debt collectors for a fee.
Credit counseling success rate
According to the Federal Trade Commission (FTC), only 21% of consumers successfully complete their debt management plans. This is because a slight interest rate reduction plus waiving over-limit fees and late charges won't help if the debt is overwhelming.
For most people, debt consolidation is the better choice. When comparing the two options, here's what to consider: With debt consolidation, you'll pay less in fees. Balance transfer cards typically charge a balance transfer fee of 3% to 5%.
The difference between debt counselling and debt review. Debt counselling is the service that a debt counsellor provides to an over-indebted South African consumer struggling with their debt, and debt review is a regulated programme that a debt counsellor will place successful debt counselling applicants under.
Debt settlement is a risky way to reduce your debts. It will help you avoid bankruptcy, but depending on the settlement amount, you may be stuck paying extra taxes. Many debt settlement companies charge high fees and take years to negotiate your debts fully.
- Credit counseling typically isn't free, although fees vary.
- Not all credit counseling agencies are reputable, so you'll have to do your research.
- Credit counseling doesn't eliminate or pay back your debts.
Based on Investopedia research, minimum debt settlement fees often start at around 15% of the debt. Maximum debt settlement fees are commonly around 25%, though they could go as high as 30% in some cases. See our picks for the best debt relief companies to find some options with fees on the low end.
Debt settlement typically has a negative impact on your credit score. The exact impact depends on factors like the current condition of your credit, the reporting practices of your creditors, the size of the debts being settled, and whether your other debts are in good standing.
- Best overall: Money Management International.
- Best for private student loans: National Debt Relief.
- Best for customized options: Accredited Debt Relief.
- Best for all unsecured debt types: Americor Debt Relief.
- Best for customer support: Pacific Debt Relief.
- Best in availability: Century Support Services.
A good credit counselor will spend time reviewing your specific financial situation and then offer customized advice to help you manage your money.
What happens when you go for debt counselling?
Your counsellor will look at everything you owe and will negotiate with your creditors for a more affordable repayment rate and even better repayment terms. In turn, your debts may take longer to pay off, but your monthly instalments will be far more manageable.
A: Request a clearance certificate from your debt counsellor and submit it to the credit bureau. The credit bureau will then remove the debt review status from your credit report.
Debt counselling usually lasts between three and five years, depending on the amount of debt, the arrangements the debt counsellor is able to negotiate and what you can afford to pay each month.
Working with a debt settlement company may lead to a creditor filing a debt collection lawsuit against you. Unless the debt settlement company settles all or most of your debts, the built-up penalties and fees on the unsettled debts may wipe out any savings the debt settlement company achieves on the debts it settles.
- Debt Settlement Fees. Many debt settlement providers charge high fees, sometimes $500-$3,000, or more. ...
- Debt Settlement Impact on Credit Score. ...
- Holding Funds. ...
- Debt Settlement Tax Implications. ...
- Creditors Could Refuse to Negotiate Your Debt. ...
- You May End Up with More Debt Than You Started.
Debt settlement can be done on your own or through a third party, depending on your needs. Risks include creditors not agreeing to settle and more damage to your credit score. You may need to pay taxes on any amount settled, so talk to a tax professional before pursuing settlement.
- The counselors are accredited or certified by an outside organization.
- The agency offers a range of services, and is not trying to push a specific product, such as a Debt Management Plan..
Not directly. While merely talking to a credit counselor won't impact your credit score, taking action on any debt management plans they recommend could.
Beware of Hidden, Up-Front and Monthly Maintenance Fees
So, you may be sending lower monthly payments to your creditors, but you could be losing money by hidden fees your new “business partner” might not reveal to you. Before you sign any contract for services, read every word of the contract.
There is a high probability that you will be affected for a couple of months or even years after settling your debts. However, a debt settlement does not mean that your life needs to stop. You can begin rebuilding your credit score little by little. Your credit score will usually take between 6-24 months to improve.
How often is debt settlement successful?
Completion rates vary between companies depending upon a number of factors, including client qualification requirements, quality of client services and the ability to meet client expectations regarding final settlement of their debts. Completion rates range from 35% to 60%, with the average around 45% to 50%.
“Negotiating with a collection agency can be challenging, but it is vital to reach a fair settlement,” Raymond Quisumbing, a registered financial planner at Bizreport, said. “Offering 25%-50% of the total debt as a lump sum payment may be acceptable.
Yes, you can buy a home after debt settlement. You'll just have to meet the lender's requirements to qualify for a mortgage. Unfortunately, that could be harder after you settle debt.
Yes, it is possible to get a loan after a settlement, but it can be more challenging depending on the nature of the settlement and your financial situation. Here are some factors to consider when trying to get a loan after a loan settlement: Credit History: Your credit history plays a vital role in loan approval.
| Pros | Cons |
|---|---|
| Might be able to settle for less than what you owe | Creditors might not be willing to negotiate |
| Pay off debt sooner | Could come with fees |
| Stop calls from collection agencies | Could hurt your credit |
| Could help you avoid bankruptcy | Debt written off might be taxable |
