Best Relief For Credit Card Debt – Credit Counseling Or Debt Settlement?

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Best Relief For Credit Card Debt – Credit Counseling Or Debt Settlement?

While the United States economy suffers from the mortgage crisis, credit card debt has ballooned as the next witch brewer is ready to bring its own potent poison to the table. Credit card debt has been out of control for years, but the situation has worsened as other forms of credit have dried up. Home equity loans are no longer a ready cash cow for acquisition Americans, and rising unemployment rates have more people tap credit cards to the limit.

Credit Counseling and debt settlement

So it’s no wonder that organizations that help consumers resolve credit card debt are extremely busy, serving thousands of new clients. There are two popular approaches to solving credit card debt problems – credit counseling and debt settlement.

Each helps clients by educating them in ways to get out of debt and stay that way, but the approach is significantly different. The goal of credit counseling is to pay off debts in full by negotiating lower interest rates, while debt settlement companies pay off debts quickly by negotiating reductions in the amounts owed. The main differences are:

Credit counseling:

1. Negotiate reduced interest, pay off full original balance

2. Client pays monthly amount to advisory services, which makes payments to creditors

3. Monthly payments usually higher

4. Compensated by lenders’ fees, 4-15%

5. More BBB complaints

6. 83.9% of BBB complaints resolved

7. 21-26% reported success rate

8. Professional associations: National Federation for Consumer Counseling (NFCC) and Association of Independent Consumer Credit Counseling Agencies (AICCCA)

Debt settlement:

1. Negotiate a reduced balance, then pay them off in full

2. Client sets up a separate savings account, pays its own bills

3. Monthly payments usually lower

4. Directly compensated by clients, 10-15%

5. Fewer BBB complaints

6. 91.5% of BBB complaints resolved

7. 40-55% reported success rate

8. Professional Association: The Association of Settlement Companies

Different approaches to different problems

But the biggest difference is that these two approaches are designed to help people with different levels of debt. Consumers with credit card debt less than $7,500 should probably not consider debt settlement. In such cases, credit counseling or a do-it-yourself program would be a better approach.

But people who have accumulated very high levels of credit card debt may find debt reduction the best way to clear the deck and regain control of their lives. Companies that subscribe to The Association of Settlement Companies (TASC) standards work towards paying off all balances in 12-36 months.

A necessary alternative to bankruptcy

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 alone eliminated personal bankruptcy for most Americans. As this option was taken off the table, today’s consumer credit industry began to reshape itself to meet the needs of consumers with exceptionally high levels of unsecured debt.

Let’s be clear about this: debt settlement isn’t for everyone, but it does offer a much-needed alternative to bankruptcy for people who, for whatever reason, can’t meet their obligations. People who can’t even make the minimum monthly payments on credit card debt are unlikely to succeed with a credit counseling solution that requires even higher monthly payments.

Criticism and comparisons

For an industry with so much to offer the public, debt settlement has been subject to a lot of criticism recently, mainly for two reasons: 1) the industry is new (less than five years old) and not well understood; and 2) a few bad companies have sullied the reputations of the majority of legitimate, highly ethical ones. The industry corrects both problems by creating a higher public profile to raise awareness and understanding, and by sorting out the bad apples.

The credit counseling industry, led by the NFCC, is not at all reluctant to throw stones at debt settlement, perhaps even questioning the very existence of the industry. But a quick look at the comparison above should alert readers to several concerns about credit counseling. There are two in particular.

First is the issue of who pays credit counseling agencies. Some have noted that they seem to be good collection agencies for the card companies, because creditors pay fees to them (which is not the case with debt settlement companies).

Then there is the issue of effectiveness. The credit counseling success rate of 21-26% is well behind the 40-50% reported for debt settlement. If your​​​​financial future was on the line, what would you choose?

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