So you’ve found yourself in some credit card debt.
Maybe your household experienced a job loss or you were hit with some unforeseen medical expenses. No matter how you got here, you need to get yourself out.
Dealing with credit card balances higher than your paycheck can be frustrating to say the least. You’re paying your monthly minimums, but your balances are just increasing on every statement.
You need another way to pay down your debts that’ll get you to the finish line faster. This is when you might consider debt settlement or debt consolidation.
But which one is right for you?
Don’t worry, the team at GOOD is here for you. We’ll take you through the processes for debt settlement and debt consolidation. Then, we’ll lay out the pros and cons of each.
This way, you’ll have a better idea of which route is best for you.
We’ll cover the following:
- Debt Settlement
- What is Debt Settlement
- Debt Settlement Options
- Phone negotiation
- Debt settlement letter
- Debt Consolidation
- What is Debt Consolidation
- Debt Consolidation Options
- Debt management plan (DMP)
- Balance transfer credit card
- Personal loan
- Home equity loan/line of credit
- Debt settlement vs debt consolidation
- Pros and cons of debt settlement
- Pros and cons of debt consolidation
What Is Debt Settlement?
Debt settlement is the process of paying back a portion of what you owe, in exchange for the rest of your debt being discharged.
There’s two ways you can do this.
The first is to make a single lump-sum payment.
The second involves creating a repayment plan where you will make monthly installments to your creditor until the debt is cleared.
Of course, your creditor will prefer the first option. This ensures that they will receive all of their money upfront.
However, this isn’t always a plausible situation for everyone. So if you don’t have the money to settle your debts in your wallet right now, you can propose a repayment plan.
Debt Settlement Options
Paying less than you actually owe and becoming debt free faster sounds really appealing to you. So, you’ve decided to look more into debt settlement.
There’s 2 ways you can do a debt settlement:
- Phone Negotiation
- Debt Settlement Letter
A phone negotiation is exactly what it sounds like. You’re going to call your creditor and attempt to negotiate your debt over the phone.
So how exactly does it work?
First things first, call your creditor and introduce yourself. Let them know that you are calling because you’re in an extreme financial hardship and cannot afford to pay your balance as is. Tell your creditor that you’re trying to do the honorable thing by working out a settlement you can both agree on.
Once you’ve done this, go through the reasons why you’re in this situation. You don’t want to leave anything out.
So if you were out of work at the same time your son needed expensive dental work, tell them. This is your one chance to convince your creditor that you need a lower settlement because of your extenuating circumstances.
After you’ve explained everything, let your creditor talk and give the first offer. From there, use your negotiation skills to come up with a settlement that works for both parties.
Be prepared to fight for a lower settlement. Remember that it’s your creditors job to get back as much of that money as they can. So, they’re not going to give you their best offer right off the bat.
Don’t forget to keep in mind your budget. The last thing you want to do is negotiate a settlement that you cannot afford to pay. This will leave you in a way worse position than you were originally.
A phone negotiation requires a certain level of comfortability. You’ll have to be able to answer any question your creditor asks you, and there’s the chance that the call could escalate.
If you can deal with that, a phone negotiation is your best bet when it comes to debt settlement. It will always give you the greatest odds of a successful settlement. But if the thought of talking to your creditor over the phone makes you sweat and your heart beat faster, don’t worry because it’s not your only option.
Debt Settlement Letter
If the thought of calling up your creditor and negotiating a settlement is just too uncomfortable, you can send a debt settlement letter instead.
The premise is the same as a phone negotiation. You’ll want to list out your account information for your creditor so they’ll have easy access to your file. Then, you’ll want to explain your hardship to your creditor. Tell them all the reasons why you cannot pay, just as you would over the phone.
Once you’ve made your case, give your creditor your initial offer. Remember, this can take some back and forth. Even though you’re writing a letter, your creditor can give you a counteroffer. So, start below your real budget.
Don’t forget to include whether you’ll be paying the settlement as a lump sum, or if you’ll require a repayment plan.
Once you’ve sent your letter, you should expect a response back within 2-3 weeks.
What is Debt Consolidation?
Debt consolidation is the process of combining multiple debts into one consolidation loan with one monthly payment and one interest rate.
When it comes to credit card consolidation, you’ll want to look for a consolidation loan with a lower interest rate than you currently have on your credit card.
This will allow you to pay less each month, while still getting out of debt faster than you would otherwise.
Debt Consolidation Options
When it comes to consolidating your debts, the options get a little more complicated. There are a couple of different routes you can take. It all depends on what is going to benefit your personal situation the best.
There are four options when it comes to debt consolidation:
- Debt Management Plan (DMP)
- Balance Transfer Credit Card
- Personal Loan
- Home Equity Loan/Line of Credit
Debt Management Plan (DMP)
A debt management plan will give you the ability to work with your creditor on a repayment plan which you’ll be on for the next 3-5 years. By creating the repayment plan, you’ll be able to reduce your monthly payment and interest rate.
Along with a plan of action, you’ll also receive access to education programs and credit counseling. These will be crucial tools to keep you out of further financial troubles in the future.
All of these reasons make a debt management plan the most popular choice amongst consumers.
If you’re thinking about starting a debt management plan, make sure you have patience. This process will take years to complete so be realistic about your expectations when going into it. This will not erase your debt overnight. This will take time and consistent effort.
— Get Out of Debt (@getoutofdebtcom) May 3, 2018
Balance Transfer Credit Card
Opening another line of credit might not seem like a good idea at first. Isn’t that how you got yourself in trouble in the first place? Don’t worry, there’s some method in our madness.
Look for a card that will offer you a 0% balance transfer. Most of the time that rate will last for 12-18 months. Make sure you read the fine print on your card, you need to have this paid off by the time the interest starts kicking in.
By transferring your balance to a 0% transfer credit card, you’ll be able to go 12-18 months without adding any additional interest to your balance. This means that everything you pay will go straight to principal, essentially helping you pay your debt off faster.
Unfortunately, this option is limited to individuals with great credit scores. So if you’re having some trouble in the credit department, this might not be the most reasonable option for you. Lenders are looking for scores up around 700 for this type of card.
Some things you might want to keep in mind is you’ll most likely have to pay a transfer fee. This range anywhere from 2-3% of the balance transferred. Additionally, you have to be mindful of when your introductory 0% interest period is up.
A personal loan is another option that involves taking on a little more debt upfront. Your local bank, credit union, or an online lender is the source you’ll want to go through to get a personal loan.
By taking out a personal loan, you’ll have one fixed monthly payment you’ll be responsible for. The interest rates can vary on these but it will be a fixed rate lower than you’d expect on a typical credit card.
Pay close attention to origination fees, prepayment penalties, and collateral requirements when shopping for a personal loan.
Home Equity Loan/Line of Credit
Taking out a home equity loan or line of credit means you’re putting your house up as collateral for the loan. Essentially, if you fail to make timely payments, your house could be lost. So, you want to be absolutely certain you’ll be able to meet the repayment requirements before committing to this.
The upside to a home equity loan or line of credit is the low interest rates that are offered. However, they also come with application fees and closing costs.
Debt Settlement vs. Debt Consolidation
So we laid out a lot of options for you above. If you’re feeling a little overwhelmed when it comes to choosing one, take a deep breathe. There’s a couple of things you should consider when deciding which route to take.
Take into account:
- How much will this cost me?
- How long will it take me to clear my debts?
- What impact will this have on my credit score?
Let’s delve a little deeper and take a look at the pros and cons that come along with both processes. That way, you’ll be able to make a more informed decision of which process will put you in the best financial position possible.
Debt settlement and debt consolidation are both here to help make your debts more manageable. However, they are really different when it comes to the amount of time it’ll take you to get out of debt and the effect it’ll have on your credit report.
So which is best for your personal situation?
Pros of Debt Settlement
- Your debt will be reduced drastically
- Flexible repayment plans
- Save money every month
- Avoid bankruptcy
- Completed in 3-5 years
Cons of Debt Settlement
- Credit score will be affected
- Creditors are not required to accept your settlement offer
- Debt balances will increase during negotiations
- Collection agencies will continue to contact you
- You can be taxed on your discharged debt
- It can take a while to make your first settlement
Pros of Debt Consolidation
- You will have one monthly payment
- Lower interest rate
- Debts will be paid off faster
- Avoid further credit damage
Cons of Debt Settlement
- You can dig yourself a deeper hole if you use your credit before your program is completed
- If you do not complete the program, you will be in a worse position than when you started.
- Does not reduce the amount you pay
We know that being in debt is one of the most stressful situations out there. Not knowing where to start can be the most frustrating part of all.
Take into account all of the options we’ve laid out for you above. Pick a plan that will work for you and your lifestyle. You’ll be out of debt before you know it.
Are you considering debt settlement or debt consolidation? Let us know in the comments!