Debt Consolidation and Debt Settlement: What You Need to Know
We've had a lot of questions about debt consolidation and debt settlement companies. In this article, we explain these services for those looking to buy a home.
Credit Security Group helps borrowers qualify for home loans and get the best loan possible.
Before you make a major purchase – and before you obligate to months of credit repair – educate yourself and speak to an experienced expert in credit scores.
What do we mean by debt here?
It's important to understand we are talking about current debts here, not debts that have been charged off or sold to a collection company. This article is about current debt, mainly credit card debt.
What is the difference between a debt settlement and debt consolidation company?
A debt consolidation company offers you a loan. The loan rolls all your covered debts into one payment. They loan you the money to pay off the debts and then you make payments on that loan.
Alternatively, a debt settlement company promises to settle your debts for a fee plus the settlement amount.
The two terms are often used interchangeably; but they are very different services. Many debt settlement companies will call themselves debt consolidation, so you have to understand the details of the programs they offer to really know which is which.
What does a debt consolidation company do for me?
A debt consolidation loan can mean lower monthly payments and, ideally, lower total payments on your debt. Also, a huge decrease in your credit card balance will raise your credit score – often dramatically.
You should get a much lower interest rate – compared to a credit card. Make sure to look at the total loan plus interest amount. Your credit score matters for this loan as it does with all lenders. The lower your score, the less likely you'll be to get a loan and the higher your interest rate will be.
Note that installment loans, like a mortgage or car payment, cannot be consolidated.
What does a debt settlement company do for me?
Usually they claim to save you money by offering (forcing?) the debtor to accept less than you owe them. This means your debt has been charged-off, you've defaulted, not paid as agreed.
If you've watched our video, alarm bells are going off for you. Your credit score has been destroyed!
What other debt relief options are there?
Debt Relief for Military Service Members
You may qualify for a reduced interest rate on mortgage payments or credit card debt, protection from eviction, or a delay of all civil court actions, such as bankruptcy, foreclosure, or divorce proceedings under the provisions of the Servicemembers Civil Relief Act (SCRA). To find out if you qualify, contact your local Armed Forces Legal Assistance office.
There are services through credit counseling agencies that reduce your interest rates and take over payment on your accounts for a monthly fee. This can save money and keep your credit score by not missing payments.
One organization of this type that we've heard good things about is the American Credit Foundation.
Does using credit counseling hurt my FICO score?
Some creditors will note on your credit file that you are using credit counseling. This alone does not hurt your FICO© score. The only relevance to your score here is whether the agency is making payments as agreed.
If you use a service like this, you should verify that payments are being made – on time. This is particularly important during the transition from you paying the bills to the service paying the bills. We have seen several cases of confusion or error during the transition; payments being missed, not caught, and serious damage done to credit scores.
The federal government recommends that you only contact credit counseling services accredited with either of these organizations:
Debt Settlement: What to watch out for?
Any company that tells you to stop making payments on your debts, stop communicating with your creditors or claims they'll make debts and debt collections go away.
One couple who came to us dealt with a company who told them to stop paying on their credit cards. Just stop paying them. Let them go 30, 60, 90, 120, 180 days late and then charge off. They did this and started paying the company $2,000 a month for this "service." This $2,000/month wasn't going toward paying down the debt; this was just fees to the company.
"After the cards are charged off," the company told them, "call us back and we'll help you settle the accounts at lower cost." The couple called them back and the company sold them a $50,000 loan at 27% interest to settle the charged-off credit card accounts they had stopped paying.
End result: More debt and a ruined credit score.
You would know better, right? Have you ever been interested when you hear the ad: "Do you owe over ten thousand in credit card debt? Here's what the credit card companies don't want you to know…"
Stress and struggle can make all of us do things we know we shouldn't do – later. These companies take advantage of us when we're most vulnerable. This is why this area attracts some very dodgy players. There are good companies, but you must keep your guard high and your emotions low.
For certain: Don't pay anyone to tell you to stop paying your credit cards.
The FTC recommends not doing business with any company that:
- Charges any fees before it settles your debts
- Touts a "new government program" to bail out personal credit card debt
- Guarantees it can make your unsecured debt go away
- Tells you to stop communicating with your creditors, but doesn’t explain the serious consequences
- Tells you it can stop all debt collection calls and lawsuits
- Guarantees that your unsecured debts can be paid off for pennies on the dollar
What do you recommend?
Don't do this if you can avoid it.
If it can't be avoided, be very careful in choosing the organization you deal with, make sure you get all the facts, check out their reputation and affiliation, and always verify that your debts are being paid on time and as agreed.
There are many good and bad options for people who are in financial trouble. Credit Security Group serves families trying to buy a home, so our advice in this article is for this purpose: to help you qualify for a home loan. This means protecting your credit score and your ability to qualify for a mortgage loan.
- Do whatever it takes to pay your debts as agreed. Stop using your credit cards, cut your expenses, don't take that vacation; whatever it takes. (A good strategy is to pay the minimum due on all accounts and pay whatever you have left on the lowest balance account – until it's paid off. Then move to the next lowest balance account…)
- Avoid new loans and new credit accounts.
- Resist anything that seems too good to be true or any quick fix, get-out-of-debt appeal. Deal only with reputable companies who have been referred to you by people you can trust.
If your goal is to buy a home and you don't know where to start, contact us for a Credit Security Analysis. We'll provide education, analyze your credit as it relates to your life goals, and develop a realistic, personalized plan to get you on the right track to a home loan – whatever your situation. Knowing the truth, having a plan, and doing the next right thing can be a great comfort for you and your family.
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