Debt settlement and debt consolidation both offer ways of
reducing your debt. Debt settlement eliminates part of your
loans, while debt consolidation reduces interest rates. Even
though debt consolidation has the least impact on your credit
score, there are cases when debt settlement is a better option.
Lower Debt
The goal of both debt settlement and debt consolidation is to
lower your debt. Debt settlement companies negotiate with your
creditors to sometimes reduce the amount of your loans. You will
be charged a fee, and the debt reduction will remain on your
credit score for seven years.
Debt settlement can reduce your debt 10% to 50%. To get the most
out of the program, pay off the rest of your debt as soon as
possible. Also, close accounts that you don't plan on using to
raise your credit score.
Debt consolidation pays off your high interest debts with a low
interest loan. Home equity loans provide the lowest rates, but
personal loans can also be used. With rates lower on your debt,
you can pay off the principal sooner by making the same monthly
payments.
Credit Score Implication
Reducing your loans through debt settlement is a serious mark to
creditors. You credit score will drop, making you ineligible for
conventional loans. But you can apply for subprime credit after
a year. After a couple of years of good credit habits, you can
then apply for lower rate conventional loans.
Taking out a loan to consolidate your debt will have a slight
impact on your credit. Since your debt isn't actually
increasing, you will only be hit for opening another account. By
closing your paid off accounts, you can partially offset the
penalty. In a short period though, you will be in good credit
standing if you follow best practices with your credit.
Financial Choices
No one financial choice fits everyone's needs. While debt
consolidation has the least affect on your credit report,
additional loans may be too expensive. In extreme cases, debt
settlement can help to avoid bankruptcy. Before deciding on an
option, look at what companies are offering in terms of rates
and fees. And if you need additional advice, talk to a credit
counselor who can take a look at your finances and offer
suggestions.
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