Can a Debt Consolidation Company Ruin Your Credit?
When you’re desperate for help with your debt, it’s hard to know which type of company you should go with. Debt consolidation companies promise to help you repay your debt over a period of time with affordable monthly payments. Then, there’s debt settlement which promises to reduce the amount of debt you pay to your creditors. Which is the best option?
Debt Consolidation vs. Debt Settlement
Before you make a decision, you have to first understand both debt consolidation and debt settlement. Debt consolidation works out a debt management plan with your creditors, which often includes a lower interest rate and lower monthly payment. Then, all your monthly payments are combined into one and sent to the debt consolidator who is then responsible for sending payments to your creditors. Debt consolidation often has a small monthly fee and, if you stick with it, you can pay off your debt completely within three to five years.
Debt settlement can lower the total amount you owe by negotiating the total amount you owe with your creditors. If it’s successful, debt settlement can reduce your debt by 60% or more. Debt settlement isn’t as easy as it sounds. Once your creditors agree to a settlement amount, you have to be ready to give payment. So, debt settlement plans typically require you to save up to be able to settle your accounts once a negotiation has been reached. Saving up could take months, even years, depending on the amount of your debt. You end up sending thousands of dollars to a debt settlement company without seeing any results. Meanwhile, you have to dodge calls and letters from debt collectors demanding payment on your debt.
Fees for Debt Services
Most reputable debt consolidation companies charge a small monthly fee that’s less than $50. When the service fees go above that numbers, you should question the legitimacy of the company.
Debt settlement charges higher fees and among different settlement companies, the fee structure varies greatly. Some debt settlement companies charge a percentage of your total debt. Others, a percentage of the debt they manage to have cancelled. Finally, some debt settlement companies charge a flat fee each month. Regardless of the fee structure, debt settlement companies charge substantial fees for a service you could do yourself.
How Debt Settlement Affects Your Credit
The cost is the only bad thing about debt settlement. It can have a negative effect on your credit score. Most creditors won’t settle your debts until you’ve become three to six months behind on your payments. So, if you’re current when you start debt settlement, you’ll have to get behind on your bills. Considering that payment history is 35% of your credit score, those late payments will severely damage your credit score making it harder for you to get new credit cards and loans in the future.
How to Recognize a Bad Debt Company
The company tells you to stop making payments to your debt, but doesn’t promise to immediately begin making payments on your behalf. Even debt consolidation will advise you to stop sending payments to your creditors. The difference is that the consolidation company will begin sending payments for you during the next billing cycle. Debt settlement won’t be so hasty.
The company promises to remove accurately reported, negative information from your credit report. Credit bureaus have the right to include accurate information on your credit report – positive or negative. No company can guarantee to remove data from your credit report.
The company won’t give you a written breakdown of how your payments will be used. Reputable companies will be upfront about the way your payments are used. If you can’t get a straight answer about what’s going to happen with your money, move on to another solution.
Monthly fees are more than $50. High fees are one of the easiest red flags of a debt company that doesn’t have your best interests in mind.
There are legitimate debt consolidation companies out there that will work with you to come up with a plan to repay your debt. For a company near you, check the National Foundation for Credit Counseling or the U.S. Courts.