When strapped with a large amount of credit card, medical, or student loan debt, many people have trouble sifting through and finding the best option for their unique financial situation. There are many factors that need to be considered: income, credit score, and short/long term financial goals, to name a few. DebtMD is here to give you a quick rundown of the most prevalent debt relief options, along with the pros and cons of each, so you can see which one makes the most sense for you.
Debt consolidation is a good option if you have good to excellent credit and can comfortably make your debt payments, but just want to lock yourself in at a lower rate and save money. Experian defines a “good” credit score as anything above a 700. With a score in this range, you will be able to secure a low interest debt consolidation loan to pay off higher interest debts such as credit card bills. After consolidating your debt and pay off your credit cards, be sure to refrain from using those same cards again. Many people make this mistake, and it can put you in a worse off financial situation than you were previously. If you continue to overspend after taking out a consolidation loan, you’ll now have a consolidation loan payment as well as additional credit card payments. While you shouldn’t close the credit cards, as that will hurt your credit score, you should consider storing them somewhere where you won’t have access to them. Companies such as The Funders Club, Upstart, and SoFi offer unsecured loans to help you pay off your debt.
If your credit score isn’t high enough to obtain a consolidation loan at a low rate, you may want to look into a debt management plan through a credit counseling agency. Credit counseling is a process where a certified credit counselor assesses your financial situation, specifically with regard to your debt, and attempts to put together a repayment plan, which typically lasts four years. The credit counseling agency will speak with your creditors to have them reduce your interest rates, thereby lowering your monthly payment and allowing you to save money each month. In addition, whichever accounts you wish to include in the debt management plan will need to be closed. Credit counseling can come with fees, which usually consist of a $50 setup fee and an ongoing monthly maintenance fee which ranges from $25-$50. While credit counseling won’t directly affect your credit rating, if you do enroll in a debt management plan, it will be reflected on your credit report for whichever accounts you include. If you are looking to finance a new home with a mortgage or apply for an auto loan, this could raise some red flags for a potential lender. Another thing to keep in mind is that not all creditors will be willing to change their payback terms and participate in a debt management plan. Be sure you discuss this with your credit counselor so you are sure which accounts can or cannot be included. In the end, credit counseling requires discipline and the ability to stay on a budget, so if you plan on enrolling in a debt management plan, be sure you are able to afford the payment without having your credit cards as a fallback.
In the event of a serious financial hardship, whether due to a job loss, divorce, or medical emergency, you may find it difficult to keep up with your monthly minimum payments. In cases like this, it makes sense to look into enrolling into a debt settlement program. In these programs, a company tries to negotiate the principal balance on your debt so you can pay a reduced amount and resolve the debt in 2-4 years. This requires you to default on your bills and go delinquent, which will negatively impact your credit score throughout the duration of the program. In addition, there may be tax implications as a result of the forgiven debt, and creditors do have the right to file a lawsuit to recover the unpaid debt(s). Every business needs to make money somewhere, and debt settlement is no different. A debt settlement company usually charges anywhere from 15-25% of the total debt you enroll in the program. When selecting a company, be sure they do not charge any up-front fees. Most companies will charge a fee that is contingent upon them settling your debt. Because of the drawbacks associated with debt settlement, it is imperative to be sure to choose a reputable company if you are looking into doing debt settlement. For a list of vetted debt settlement providers, go here.
Each of these options makes sense for different people in different financial situations. If you are still not sure which route to go, try out our Smart Debt Analyzer. Simply enter your debt details and your main goal(s), and our technology will match you with the best debt solution providers given your unique circumstances. The companies listed on our website go through a rigorous vetting and selection process, and we only accept the most reputable companies to be listed on our platform.
Learn how credit counseling can help you become debt-free.
Learn the most common causes why people fall into bankruptcy.
Learn when using a personal loan to pay off credit cards is a good idea.
Learn the difference between secured and unsecured debt as it pertains to bankruptcy.
Learn how to negotiate credit card debt on your own.
Learn the difference between fixed and variable interest rates
Read DebtMD's guide before consolidating your debt.
A quick legal lesson on your rights if you find yourself in credit card debt
Learn more about debt consolidation loans, credit counseling, and debt settlement.
Having a good credit score can help you in many facets of life. Learn how to boost your score here.
People make mistakes with their money. DebtMD is here to show you what not to do when paying off debt.
Avoid these four mistakes to stay clear of high interest credit card debt.
Start the road to debt-free living, learn habits and tools to help you become debt free at a faster rate. DebtMD is committed to helping you reach your debt-free living goals. Start your journey toward living debt free.
Choosing the right debt relief company could be one of the most important financial decisions you make. Take a step toward becoming debt free, find the debt felief company fit for your type and amount of debt.
Subscribe to our newsletter today to receive expert advice, actionable tips, and the latest news to help you navigate the complex world of personal finance. Our newsletter is designed to help you keep your financial health in check.