Debt consolidation is the process of taking all of your unsecured debt and mashing it into one monthly payment, usually with lower interest rates, which results in a lower payment. From there, debt consolidation generally requires that you take a home equity line of credit to pay back your debt, or you could qualify for a personal loan.
What is the difference between debt consolidation and debt settlement?
While debt consolidation is the act of consolidating all of your debt into one payment that you pay off over a period of time, debt settlement is a more aggressive towards paying off debt. In debt settlement, debt specialists negotiate with the creditor on your behalf to pay off the debt balance, usually at 40% - 60% depending on the situation. The time it takes in a debt settlement program could last between 18-36 months, again, depending on the situation. Not all situations are the same.
Why I should I consider debt settlement?
If you are over 60, 90 or 120 days late on your monthly payments; if you do not own a home; if you're credit score is a little tarnished, then debt settlement may be the best course for you. Instead of having to take out a loan, debt settlement creates an account for you where you store money month after month, like a savings account. After a period of time, a debt specialist negotiates, on your behalf, with your creditors to settle the debt.
Won't closing an account negatively impact my credit score?
That depends. If you have an account with several delinquent monthly payments, then closing that account could shift your credit score for the better. Since payment history accounts for 35% of your credit score, closing the account eliminates the payment history tied to that account.
Also, rebuilding your credit score could be easily accomplished by taking out a secure credit card. Secure credit cards are cards used exactly like credit cards, but instead of having a set limit, you control how much money goes in to the card, thus controlling your limit. If you consider applying for a secure credit card, make sure the provider reports to all three major credit bureaus. Also, be sure to shop around for a secured credit card. This is a service after all and you will be charged service fees. Try to get one that works best for you and your budget.
Should I hire a debt management company?
The best advice for this is to do your homework, apply a little common sense and determine if you really need help. People who seek out companies do so because they cannot do it themselves. When you do begin your search for a company, more often than not, some companies are out there just to scam you. But, not all of them fall into that category.
If you do decide to approach a debt management company, insist that you get or will get a complimentary consultation. You should not feel pressured within the first five minutes to sign up for the service.
Upon completing the consultation, your debt specialist should have a good foundation for offering you a custom debt plan that fits you. If you do not feel like the specialist understands your financial situation, end the phone call and turn away. You should walk away from you consultation feeling confident about what you are doing.
Be sure that all of your options have been given to you up front before signing or agreeing to anything. Moreover, ask questions! And when you are done asking questions, ask more questions! Also, don't forget to be fully invested in the process. After all, you are the one getting out of debt.