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If you’re struggling to keep track of your debt and pay it off in due time, then you are among many who are in the same boat. This is a common struggle faced by a lot of people who have just started their debt financing journey and are clueless about what to do. As financing certain aspects of life become expensive, debt accumulation has reached sky-high. So, what are you to do in such a situation? Should you opt for debt consolidation with Amone or debt settlement with Credit Associates? These terms may be on your mind for a while now, leaving you frazzled about which path to take.
However, being aware of technical terms such as these is not everyone’s cup of tea and can often leave one confused. So, if you are wondering what the difference between debt consolidation and debt settlement is, then you have come to the right place. Here is a breakdown of what both elements entail and which one would be best suited for your financial situation. Read ahead to learn more and make the right decision.
Debt Consolidation vs. Debt Settlement – The Difference
In simple terms debt consolidation seeks to reduce the number of creditors you currently have. It’s a form of refinancing in which one loan is used to pay off others. Several high-interest debts in this manner can be merged with a lower interest rate. Thus, making your financial position stronger and getting more organized at paying off debt once and for all. However, it is important to realize that debt consolidation does not eliminate your original debt.
Debt settlement, on the other hand, is aimed at reducing your overall debt. It dampens the amount that you owe to creditors. For this, you need to negotiate with your creditors for debt forgiveness. It also rests on your credit score, the higher your credit score is, the better the chances are for you to receive the debt settlement at a lower fee.
In addition, a debt settlement is often the last resort after all avenues of paying off debt have been explored and there is no viable option available. This option is also taken into consideration after looking into debt consolidation. If you are unable to qualify for debt consolidation, a bank transfer, or unwilling to declare bankruptcy, then this option may be advised to you by your financial expert or advisor.
Their Impacts on Credit Scores
However, it is important to note that both debt consolidation and debt settlements can cause your credit score to take a dip. This may be worrisome in the long term, especially if you want to take a big loan in the future. A lower credit score reflects weak financial responsibility and reduces your credibility of borrowing. So, if debt consolidation or debt settlement is what you opt for, it’s important to use certain measures to pull up your credit score. Here are some of the ways in which you can do so.
- Make payments on time in the future – you can even set up an automatic payment option for amounts that are due. In this manner, you will not miss out on any payments
- Keep an eye on your financial health. Maintain and track your expenses and avoid unnecessary spending. You can do this by setting a budget for every month till your debt situation has improved.
- Frequently check your credit card reports. Report any errors or discrepancies to all your credit bureaus immediately. This will help avoid issues in the future.
- Try to avoid making large purchases for a while. This can be buying a car or luxury item on credit for instance. What’s better is to opt for a personal loan instead that comes with payments in installments.
Does It Cost Anything?
Debt consolidation may require a loan origination fee. For debt settlements, if you hire a third party for assistance, then you may have to pay a fee here as well. This can anywhere between 15% to 25% of your total amount of enrolled debt. On the other hand, it may not cost anything at all if you decide to go ahead with the debt settlement on your own. So, keeping this in mind before opting for one of these options is important.
If, however, you’re looking for an alternative for debt consolidation, you can opt for a debt management plan instead. This can be obtained from a consumer credit counseling service. They can help draft a plan for you in which you can pay off your debt in a sustainable manner. These service providers may also work with your creditors to lower you interest rates and fees.
For debt settlement, you can work with a credit counseling agency as well. It’s better to take a hit on your credit score and pull it up later, instead of going delinquent on your debts. A consumer credit counseling agency will thus help you stay on track with your bills and pay off your debts without facing long-term repercussions.
The Bottom Line
Debt consolidation and debt settlement are two different approaches to refinancing your debts. Their execution depends on various factors, your credit score is the most important one. So, if your credit score is higher, you may be able to get your hands on both options at a good deal. So, get in touch with your financial advisor or bank representatives for an in-depth discussion of what would suit your best in the long term.