The average American carries around a balance of $6,375 in credit card debt alone. That is an increase of 3% from last year. In 2017, total credit card debt held by Americans reached $1 trillion. If you have a lot of credit card debt and are looking for a quick way out, you are not alone. You’ve probably seen several terms – debt consolidation, debt settlement, and bankruptcy. These can sound similar, and each one has its unique pros and cons. We’ll look at the first two in more depth and then compare the pros and cons to bankruptcy.
What Is Debt Consolidation?
Debt consolidation takes all your debts and rolls then into one. You then take out a loan and pay off the debts. You then pay off that loan through monthly payments. In order to get a loan, you’ll probably have to have some sort of collateral. The goal is to get a reduced interest rate and lower monthly payments. Debt consolidation is best for people who are only making minimum payments.
Since most debt consolidation plans involve loans, you may have additional fees like origination fees or closing costs. Those fees can add quite a bit to your existing debt.
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Debt Consolidation Pros and Cons
- Reduce the number of bills
- Lessens chances of falling behind on bills
- May be able to get lower monthly payments and interest rates
- No control of spending habits – if you don’t reduce spending you will never eliminate debt
- Debt is not forgiven or even reduced
- Can take 3–5 years in a debt consolidation program to eliminate debt
Types of Debt Consolidation
There are several types of debt consolidation. These include a debt management plan (DMP), balance transfer on credit cards, personal loans, or home equity line of credit (HELOC).
A debt management program includes credit counselling and education programs. They can take a long time – up to 5 years – to complete. You will learn the roots of your financial problems and how to manage them.
Balance transfers on credit cards allow you to transfer your existing balances to a lower interest card. This sounds great except that 0% balance cards are hard to get. If your credit score isn’t over 700, you probably won’t get one. In addition, balance transfers come with a transfer fee of 2-3% on the balance and an expiration date of 12 to 18 months on the lower rate. Interest rates can then increase to more than your initial card.
Personal loans can be hard to get if you have a high debt-to-income ratio. You may end up with an origination fee, a prepayment penalty, and may need to have collateral (your car, home, etc.).
HELOCs have low interest rates but your home is the collateral. If you don’t make the payments, you could lose your house. Since it is a loan, you may have to pay application fees and closing costs as well.
Does Debt Consolidation Hurt Your Credit?
Debt consolidation can hurt your credit score and report. Taking out a loan requires a “hard pull”
on your credit report. This will lower your credit score for a bit. It can lower your credit utilization ratio if you open a new credit card and transfer all your balances to it.
What Is Debt Settlement?
In debt settlement, you negotiate with your creditor to lower the amount you owe. If negotiating is not in your skill set, there are companies like Pacific Debt, Inc. that specialize in negotiating with creditors and have an excellent track record in debt negotiation services. The secret to debt settlement is that you have to stop paying your bills in order to make creditors willing to negotiate. This action can come with late fees and creditor phone calls.
Debt Settlement Pros and Cons
- May be able to pay less than you owe
- Last resort before bankruptcy
- One low monthly program payout
- Faster than Debt Management
- No credit requirements or collataral
- Annoying phone calls from creditors
- Short term impact on credit score and credit report for up to 7 years
- Possible tax consequences
- Risk of creditor lawsuit
Does Debt Settlement Hurt Your Credit?
Unfortunately, debt settlement does come with some credit score and credit report damage. Your late payment history may stay on your credit report for up to seven years. You should consider debt settlement for debts that are very delinquent or already in collections or if you are struggling to even pay the minimum. That way the damage is already done to your credit score.
What’s the Difference Between Debt Consolidation and Debt Settlement?
The quick answer is that in debt consolidation, you take out a loan to pay off all other bills, then pay off the loan. In debt settlement, you negotiate with creditors to lower what you owe. When comparing debt consolidation vs debt settlement, take into consideration the effects on your credit score, the fees charged in each case, how long the program will last and how delinquent your debt.
Bankruptcy is a legal action to have your debt erased. Bankruptcy is a last resort. It can stay on your credit report for up to ten years. It is also legally complex and expensive. In debt consolidation vs bankruptcy vs debt settlement, always try debt consolidation or debt settlement first.
About Pacific Debt, Inc
Unlike credit counseling agencies or debt consolidation companies, Pacific Debt’s main objective is to eliminate your debt completely. If you successfully follow our program, you may be debt free in 2 to 4 years. To be eligible for the Pacific Debt settlement program, you must have more than $10,000 in unsecured debt
Pacific Debt, Inc is accredited with the American Fair Credit Counsel and is an A+ member of the Better Business Bureau. We rate very highly in Top Consumer Reviews, Top Ten Reviews, Consumers Advocate, Consumer Affairs, Trust Pilot, and US News and World Report.
For more information, contact one of our debt specialists today. The initial consultation is free and our debt specialists will give you all your options.
Pacific Debt has helped thousands of people reduce their debt. Since 2002, we’ve settled over $200 million in debt for our clients. Contact us today to see how we can help.