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Credit Counseling, Debt Settlement & Debt Consolidation Explained

By Michael Redbourn

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Published: 29Aug2009
Word count: 776
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The majority of people that see themselves sinking deeper and deep into debt, start off by trying to use their cards less, and then try to pay off a little bit more than the minimum requested payment each month, but they generally find that things are getting worse and not better.

The next stage is to try some sort of system that they've read about, and if they're lucky enough to find one that works for them, then they may eventually get debt free, after a number of years.

If the debt is simply too big and the interest too high, then the debtor's thoughts eventually turn to credit counseling, debt settlement, debt consolidation and even bankruptcy.

Bankruptcy is usually left to last however, as it is generally seen as the choice that will always be left when all else fails, but it should be noted however that in a minority of cases it might be the best decision for a person to make, earlier rather than later.

Most people have some idea of what credit counseling means, but they often think it's little more than sitting down and getting some tips from a friendly counselor, but it's much more than that.

How Does A Credit Counseling Service Help?

A good one will,

a) Negotiate a lower interest rate.

b) Set up a repayment plan.

c) Show you how to reduce expenses.

In a great many cases, the credit counselor should be able to reduce a monthly payment of $800 - $900 to around $550.

How Much Does Credit Counseling Cost?

The first meeting should be free, followed by a monthly charge of around $35 per month to cover operating expenses.

So How Does Debt Consolidation Differ?

Debt consolidation is completely different, and its goal is to combine all your individual debts into just one, that will have a lower interest rate than all the others combined, with only one set of charges, and one monthly payment.

Please note that debt consolidation is really only viable if your credit rating is still in good shape, or you have a home or something similar to use as collateral.

A good debt consolidation agency should,

a) Carry out all the negotiations, thereby removing a lot of the stress.

b) Get you the very best interest rate.

c) Arrange just one monthly charge.

d) Stop all the harassment.

So How Does Debt Settlement Work?

Debt settlement in essence means that the creditor and debtor agree to new loan terms that are more favorable to the borrower.

The creditor has to be persuaded that it's in its interest to do so, and that refusing to cooperate will result in the debtor declaring bankruptcy, which is the last thing that the creditor wants.

The negotiations are not for the faint-hearted, and they are also very time consuming because many times a deal that was agreed to in principle has to be renegotiated several times.

The reason for the continual renegotiation is because in almost every case, several creditors are involved and they have no interest in deals that are being made with their competitors.

So the final deals can only be sealed and signed, when there is a deal with every creditor that the debtor will be able to live with.

All of the above will damage your credit rating to some extent, and the degree to which it will be damaged will mostly depend on how it is rated when you enter into the negotiations.

If your credit rating is already in the pits, then it will hardly be affected, but if it's five star then it will suffer greatly.

In theory, if debt consolidation is done right, it should not damage your credit rating at all, as it is in essence using a home equity loan to pay off other debts, but it does mean taking out a new loan, and a restructuring of debts, which credit rating agencies don't like to see,

We mentioned above the need to have a good agent handle your affairs, and that is because there are many flakes out there, and there number is increasing because real estate agents and others that were left without gainful employment due to the recession have entered an arena that they know next to nothing about.

Nobody wants to deny them a living, but it shouldn't be at your expense.

In short, only go with an agency that is BBB (Better Business Bureau) affiliated, and if you don't understand what you're being asked to sign, then don't sign it!

Whichever option you choose, getting out of debt is a positive move, and doing it sooner rather than later is always better.

The author of this article was a film producer, and award winning film sound editor for many years. He has a passion and a flare for economics, and one of his websites -> Pay Off Debts features a large number of highly popular articles about the world's economy in general, and debts, debt settlement, debt consolidation and bankruptcy in particular.

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