Over the last number of years, I’ve been asked “what is the difference between debt settlements and credit counseling?” With that in mind, I’ve put this quick side by side comparison together to show you the EXACT difference between the two. I’ve assumed a debt amount of $50,000 for the purposes of this article, but assure you that the ratios of the numbers remain the same with an increase or decrease in debt amount. The following examines the some of the key issues for debt settlements VS. Credit Counseling VS. Doing Nothing.
Being the owner, I’ve personally looked at offering credit counseling to our clients, but after doing my due diligence decided that it wasn’t in our client’s best interest to offer this service. We have an “A+” rating with the BBB, and I want to maintain it. If you understand the truth behind credit counseling, I think you’ll see why Debt Settlements is a much better option for the client.
Premise of Each:
Making Minimum Payments on Your Credit Cards: Believe it or not, the credit card companies DO NOT want you to pay them off. Why? It’s a simple, but sometimes unbelievable answer: You become useless to them if you don’t owe them money. With that said, they’ve devised a way to perpetually keep you in debt. Their payment system has evolved our the last number of decades, but ultimately attempts to keep you in debt. Have you gotten further into debt over the last 10 years of your life? Have you ever paid off a card by making the minimum payments? Have you noticed that if you didn’t have the credit card PAYMENTS due each month that you wouldn’t need the credit cards in the first place?
Credit Counseling: Will get you a lower interest rate, and have you paid off in about 5 years. Erroneously claim that your credit will remain intact. False. Claim to be a nonprofit organization. False. While most of them will charge you a monthly fee, the majority of their money comes from the bank in a “kickback” much like a mortgage broker would make on your loan by charging you higher interest rates. Many are in contract with the bank to make sure you don’t go into a debt settlement program or BK. Recent success rates come in at only 16-20%.
Ever wonder why banks are so eager to recommend a credit counseling agency?
Debt Settlements: Will have you paid off in 2-5 years for the least amount of money possible. Will damage your credit score in the short run (however may have positive results on your credit worthiness by lowering your overall DTI), but is the most aggressive, least expensive, shortest form of debt relief. Credit restoration after graduation from the program can be combined to improve credit worthiness to a higher level than that of clients before entering the program. Instead of negotiating the interest rate, a Debt Settlement company will negotiate the amount due and typically resolves debt between 15-40% of what is owed. Current retention rate (company wide) is above 90% retention).
Total Monthly Payment:
What is minimum payment for each?
Making Minimum Payments on Credit Cards: $1250 – $1625 (depending on your Interest rate). Interest rate and payment are mutually exclusive of one another. IF interest rate exceeds 24%, any payment is 2% of debt amount, client could have negative amortization on their credit card. In other words, their minimum payments don’t even cover their monthly interest.
Credit Counseling: $883/month
Debt Settlements: $753 *make sure to look below. It’s less expensive monthly, AND it’s a much shorter program.
Time to Pay off Debt:
How long will it take you to pay off your credit cards?
Making Minimum Payments on Credit Cards: Anywhere between 15-40 years. This assumes that you don’t use them any longer. For an exact calculation of how long it will take you to pay off your debt, please visit our debt calculator here.
Credit Counseling: 60 months
Debt Settlements: 33 months *Take note that even though a Debt Settlements program is much shorter, it still costs less than Credit Counseling on a monthly basis. Also please note that our program lengths can vary to better accommodate our clients needs.
Total of Payments:
How much will you pay given your payments, and aforementioned time frame?
Making Minimum Payments on Credit Cards: $ 400,000 (Why so much? Compounding interest.)
Credit Counseling: $53,000
Debt Settlements: $25,000 (This includes all fees)
Graduation Rate:
How many people actually “graduate from said program”?
Credit Card Minimum Payments: Unknown.
Credit Counseling: Most recent information indicates that ONLY 16-20% Graduate. These numbers were given by the governing agency, and similar numbers were given by the some of the top companies in the industry.
Debt Settlements: We have a retention rate that is above 90%.
Credit Score:
What is the impact of each on the ability to qualify for a loan in the future?
Here’s the best part: If you enroll in my program over the next 2 weeks, I will pay for a credit restoration program that usually runs between $1000-$4000. Everybody wants good credit, but I know the quickest way to good credit is 1) pay off the debt, and then 2) go through a good credit program. This is an ongoing program that runs for 6 months that I’ll pay for 100%. No Gimmicks. I encourage you to call around to credit restoration companies, and ask if this is a great deal.
Credit Card Minimum Payments: Having Credit Card Debt Damages your Score, and decreases the chance of qualifying for a loan. This is because your Debt to Income Ratio reflects these payments that are part of your credit report. Also, how much you owe affects your credit score, as well. The primary thresholds of “usage” (the amount of debt that you have been extended vs. what you currently owe) are 50%, 80% and 100%. Once exceeded, your credit score will drop as a result. The less debt that you have on your credit report, the higher your credit score and probability of getting a loan will go up also.
Credit Counseling: HERE’S THE BIGGEST LIE OF THEM ALL. CREDIT COUSELING SELLS YOU ON THE IDEA THAT YOUR CREDIT SCORE WON’T BE DAMAGED. It’s a very misleading. While your score will remain intact, what they don’t tell you is that your credit report will have a new code on it, that shows you’ve been through a credit counseling agency, and will be denied most credit applications. I’ve personally witnessed clients with a 750 credit score get denied a loan because they went through a credit counseling program; and this was in 2005 when they were giving money away. Don’t be fooled.
Debt Settlements: It’s true. Debt Settlements will damage your score, for a shorter time. Remember, the mere act of paying off the debt (in the quickest time possible) will get you back on track quicker than any other option. Usually I recommend that my clients (once done with the program) go to a good credit cleanser. At this point their debt will be paid off, and their credit score will be given the chance to get a higher score than before they had come into our program because of the fact that we have paid off their debt and removed the late marks from the credit report.
Banks are no longer offering “stated” loans. This means that regardless of your score, your income has to be sufficient in acquiring a loan. Again, through debt settlements (paying off your debt), and then credit cleansing (getting derogatory marks off your credit report), one is able give themselves the highest possibility for qualifying for a loan in the future.
Are debt settlements a scam?
No. I get a lot of questions about the legitimacy of debt settlements. The reason that most people hear so much negative publicity about debt settlements stems from two primary reasons:
1. A lack of information given to the client that originally enrolled in their program.
2. Upfront fees.
Know that we’ve put together a program where it’s literally impossible for us to take advantage of you. You’re in control of your money at all times, and we have no cancellation fees. We’ve designed it so that it is a no brainer for somebody who is looking at getting out of debt. I give as much information up front to the client so that they understand everything, and with our program, there are no upfront fees.
Three of the primary tools we use to help people understand the legitimacy of our services is through our Better Business Bureau rating, our Settlements Letter Page, and Testimonials from past clients. If you haven’t visited them yet, you can do so below.
BBB Rating Settlement Letters Page Testimonials Page
I hope this helps to answer many of your questions. If you’re interested, or need other questions answered, please give me a call any time.
858-240-6157
Make it a great day,
Nick Vaccaro | Loss Mitigation | Financial Consultant
(: 858-945-8230 | 7: 888-385-4150| *:nick@americanfpg.com
