Perhaps part of your strategy for climbing from under the mound of bills that have buried you are making a sound decision: debt settlement vs debt consolidation. Although many use the words interchangeably, there are some differences between these two game plans.
Debt consolidation occurs when all of your outstanding debt is combined into one amount and you create one monthly low-interest payment, as opposed to several high-interest payments to different lenders. You may achieve consolidation on your own by transferring balances from several credit cards to the one credit card that has the lowest interest. Another way to consolidate is to apply for a consolidation loan. In this case, you must have a good credit record, consistent payment history, reasonable debt-to-income ratio, and not have had too many credit inquiries in the last year. In other words, you must apply as you would normally for a loan and have all of your financial accounts and affairs in perfect order.
Debt settlement operates a little differently. It is primarily a negotiation that is handled with your creditors to lower the amount of the debt (usually by 35 to 55 percent) and it eliminates late fees and high interest rates. Debt settlement companies usually negotiate on your behalf and get your creditors to lower your debt amount and fees. Then you pay that single negotiated fee to the debt settlement company each month, and the company representatives pay your creditors.
A debt settlement scenario usually requires that you operate in a “buyer beware” mode, however. Not everyone who represents himself as an expert in debt counseling is ethical, and not every company holds its workers accountable for actually keeping promises made to clients. Some of the worst abuses have evolved because debt settlement companies (as well as debt consolidators) have not paid the money to the creditors of their clients. For this reason, it is extremely important for you to stay in communication with your creditors to make sure the money is actually being applied to your accounts.
When you have to weigh the differences between these two options to determine which is best for you, you must really be honest about what your situation is at the time. If you believe that you have a higher quantity of bills than you are in a good position to handle, then debt consolidation is the answer for you. If you believe that your debt is simply too much for you to handle overall and you are drowning in it, then you should probably consider a debt settlement. Consolidation rescues you from interest rates and fees. Settlement helps you lower your total debt to a manageable amount.
There is no easy way to tell is you should decide on debt settlement vs debt consolidation. Every financial situation has a unique set of circumstances that make one or the other a more fitting solution. Whichever path is best for you should be the one that impacts both the debt that is staring you in the face every single day as well as inspires you to change your spending and credit trends. Your choice should make you breathe a lot easier.
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