If you’re struggling with improving your finances, you may have seen several different services offering to help. Each type of service has a different goal, so picking one over the others could change the amount you have to pay toward your debt, and the impact on your credit score may vary by service. Which service you should choose depends on your debt, your goals and budget.
What Are the Basics?
While the broad goal is to improve your financial situation and credit score, each service has a different primary purpose.
- Debt settlement seeks to reduce the amount you have to pay. This could be by offering a lump sum payment for pennies on the dollar or negotiating a payment plan that won’t pay off the full debt.
- Credit counseling works on improving your finances by helping you develop better habits like sticking to a budget and finding ways to pay off your debt as quickly as possible. It may also help you do things such as negotiate for lower interest rates, find a personal loan and use balance transfers, but in most cases, the end goal is to pay off your debt in full.
- Credit repair focuses primarily on your credit score and removing negative items from your credit report. Paying down your debt may be part of this, but it is only one possible tool, not the ultimate goal.
Is One Type of Service More Legitimate Than the Others?
Many providers who only offer one of the debt settlement, credit counseling or credit repair services will try to diminish the other two services, even to the point of implying that they’re a scam. The truth is that as long as you pick a reputable company, each type of service is perfectly legitimate.
Of course, because the different services have varying methods and potential outcomes, there could be one that is better for improving your finances than the others.
Does the Amount of Debt Matter?
Certain programs may set minimums or maximums for the amount of debt they’ll work with, but the rules aren’t set in stone. There are a few general guidelines to consider:
- If you’re struggling but still able to make at least your minimum monthly payments each month, credit counseling may help you find a little breathing room without damaging your credit score.
- If you can’t keep up with your payments but haven’t taken a big credit score hit yet, debt settlement may help minimize the damage.
- If you’ve already gone into default, had an account charged off, or entered or considered bankruptcy, it may be time to shift your focus to credit repair.
What Happens to My Credit Score?
In terms of credit scoring, there are clear winners and losers when it comes to improving your finances.
- Credit counseling: Because credit counseling focuses on finding ways to pay your debt in full, it will not hurt your credit score and may actually help you to build positive credit history over time. Even if you negotiate lower interest rates or transfer balances, it still counts as a paid-in-full account.
- Debt settlement: Debt settlement will almost always lower your credit score. Since the creditor loses money on a settlement, settled accounts are marked negatively on your credit report. However, continuing to add missed payments or having an account charged off could lower your credit score even more.
- Credit repair: In theory, credit repair can only raise your credit score, but that only tells part of the story. If you switch into credit repair mode before your accounts are paid, settled or discharged in bankruptcy, additional negative items could still be added to your credit report.
How Long Does it Take?
There are no clear-cut answer for the amount of time it will take improving your finances and each service. It varies widely based on your exact situation.
- Credit counseling often involves either one-on-one sessions or attending classes. Depending on the timing and how quickly you’re able to follow their suggestions, you could start seeing results in days or weeks. Bigger changes, and actually paying your debt completely off, could take months or even a few years.
- Debt settlement depends entirely on the status of your account. If you have an account in collections with a debt collector willing to settle, it may take a single phone call. If you have a high credit card balance but have managed to make your minimum payments on time, the issuer may require you to enter into a special program before they’re willing to settle. Overall, expect anywhere from a few weeks to a few months.
- Credit repair is another process that can take anywhere from days to months. Creditors have 30 days to respond to credit bureau disputes or updated information on an open dispute. Some may fix obvious errors faster, but there is often a processing backlog that pushes them right up against the deadline. If you’re trying tactics like goodwill letters or pay-for-deletes, expect several rounds of back-and-forth letters or phone tag.
Which Should I Choose?
When you consider the above information and how willing you are to spend your limited free time, the answer may be all three. Remember, credit counseling will help with improving your finances by teaching you good spending habits, debt settlement will help with debts you can’t pay in full and credit repair will help reverse damage to your credit report. Whether you need one, two or all of these services, you are free to customize a plan that meets your needs.