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Debt Consolidation Versus Debt Settlement

Debt Settlement Versus Debt Consolidation

Like many Americans, your debt is probably overwhelming. Credit card companies charge exorbitant fees, and revolving credit card debt carries a variable rate interest that compounds. Plus, if you're just ONE day late, they'll hike up your interest rate to about 30%--the universal default rate. "Credit card issuers continue to make subtle changes to squeeze a little bit more out of their customers," says Bill Hardekopf of "We're seeing it in late fees, cash advance fees, and default fees."

To top that off, if you have other credit cards, those creditors can, and generally do, raise your interest rates because of your being late on a payment to another account. As unfair as this seems, that's what happens, and that's how people end up being swept away by compounding debt. So, what do you do? Two popular solutions that have been proven to be effective in avoiding bankruptcy: debt consolidation and debt settlement.

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Debt consolidation typically consists of getting a loan and paying your debts from the proceeds. Debt consolidation is usually secured by home by means of a home refinance loan. Debt consolidation is better for credit in the short run because your scores will quickly rise shortly after the lender pays your debts out of the proceeds of your debt consolidation loan. But, it's getting hard to qualify for them. According to an Arizona Republic report, more banks are tightening lending standards on home mortgages and other consumer and business loans as a deepening credit crisis exerts a heavier toll on the economy.

Debt consolidation is best for people who have a lot of secured debt (e.g., auto loans, student loans, etc.) that they wouldn't be able to get discharged in a bankruptcy or get settled in a debt settlement negotiation. If you go this route, be sure to get a fixed rate mortgage. The rates are competitive with those of adjustable rate mortgages (ARMs), but the payment remains fixed and predictable. And the monthly payment is much easier to budget over the long run.

If most of your debt is revolving credit card debt or other unsecured debts like personal signature loans or medical bills, you may want to consider debt settlement. Debt settlement usually offers more debt relief, and it's quicker because once you settle and pay the debt, it's gone forever. Why put your house up as collateral and trade unsecured debt for a secured debt? Refinancing your home or getting a second mortgage, gives you a secured debt that you can't get discharged in bankruptcy if your financial situation unrepentantly worsens. Plus, by refinancing or getting a 2nd mortgage, you run the risk of joining the ranks of millions who are losing their homes to foreclosure.

Debt settlement negotiates balances paid. And, settlement usually only pays back a portion of debt owed. That will make things easier on your pocketbook. And, you don't have any lingering debts or continued negative reporting on your credit report. Typically, once you get to this point, having to close your credit card accounts to participate in a debt settlement program is of little to no consequence.

Short term, it will damage your credit because creditors will generally report "Settled" or "Paid in Full for Less than Full Balance". But, depending on the debt negotiator you hire, you could end up getting that completely removed from your credit report and have "Paid in Full" reported instead. It's part of what accomplished debt negotiators can get the creditors to agree to. Some have credit repair services built in to the debt settlement program that cleans up the negative reporting after you've paid the debts.