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Debt Consolidation Facts

1. If you spend more than 50% of your credit limit every month, this indicates to the Credit Bureau that you do NOT have enough cash on hand to meet your monthly expenses. This will identify you as a high credit risk and will actually reduce your credit score by 60 - 70 points overnight (Fair Isaac).

2. If you miss 1 or 2 payments on your credit card debt, the issuing company will skyrocket your interest rate to a whopping 27% - 30%!

3. Out of a random sample of 3 million American consumers (included in Experian's National Score Index), 51% of them have at least 2 credit cards and 14% of them have 10 or more credit cards.

Debt consolidation or debt settlement?

It’s a weighty decision, since your whole financial livelihood is at stake here.  One option could wipe out your debt, but keep you paying on it in the long term.  The other could wipe out your debt in a relatively short amount of time, but leave you fighting bad credit for years to come. 

If you are at the crossroads of making a decision as to which to use, read on. 

Video: The Pros and Cons of Consolidating Debt

Pros and Cons – Debt Consolidation

So, you’re considering debt consolidation, eh?  Before you dive into that pool of possibilities, you should understand the pros and cons.  Although debt consolidation has its advantages, it will also have some distinct disadvantages.

Pros –

  1. Can reduce the high interest on those credit cards to a much lower rate.
  2. One lower monthly payment paid to one creditor.
  3. Wipes out all your unsecured debt.
  4. You can include other secured loans – e.g., auto, boat.
  5. Paid off accounts reflect positive activity on your credit report.
  6. Improves your credit score.
  7. No more late fees and over-the-limit fees for these accounts.
  8. Tax deduction for the interest if you used a form of mortgage loan.

debt settlement versus debt consolidation

Cons –

  1. May be difficult to find decent interest rates.  Interest rates on new loan may be same as interest rates on existing accounts.
  2. You end up paying the entire amount of the debt owed, including late fees and over-the-limit fees incurred.
  3. Can take much longer to pay off your debts.
  4. You may pay more interest over the long haul.
  5. Many accrue additional debt after consolidation.
  6. You could lose your home if you used some form of mortgage loan and can’t pay the payments.
  7. You may be disqualified for the loan due to a low credit score.
  8. You can no longer pay off the smaller debts with higher interest rates, since they are consolidated in with the rest of your debt.

Video: Is Debt Consolidation a Good Way to Pay Off Debt?

Pros and Cons for Debt Settlement

Debt settlement is appealing to many due to the fact that so much of your debt is canceled or “forgiven.”  The drawbacks make it unappealing, however, to anyone who doesn’t want to fight an uphill battle against negative marks on their credit and have to cure an injured credit score.  Below are more detailed pros and cons:

Pros –

  1. Can be debt free within 36 months.
  2. Satisfy debts for less than owed, saving you up to 60% of debt owed.
  3. More money to spare, start an emergency fund, or save toward retirement or luxuries.
  4. Many creditors will re-age your accounts and bring them to a current status, helping your credit score.
  5. Includes all unsecured debt, and medical bills in excess of $1000 may be also be included.
  6. No more open negative marks on your credit report.
  7. Debts are typically no longer subject to collection or legal action.

debt consolidation vs. debt settlement

Cons –

  1. Debt settlement companies typically charge upfront fees, monthly fees and wait to pay your creditors until you’ve accrued enough in your account to settle.
  2. Debt Settlement companies even charge you a percentage of the “forgiven” debt.
  3. Unless you negotiate with your creditor beforehand, your paid off debt will appear as a negative “settled” rather than “paid in full.”
  4. This is for unsecured debt only.  Your mortgage, car loan or any other secured loan cannot be included.
  5. Collector could sell remaining debt to another collection agency if you fail to obtain written notice from your creditor stating you no longer owe the debt.
  6. Portion of debt “forgiven” by the creditor is typically reported to the IRS as income.
  7. You pay tax on “forgiven” debt reported to the IRS .
  8. Negative marks on your credit report continue until payments commence.

Now that you are informed of the pros and cons of debt consolidation and debt settlement, you are empowered to make that big decision.  Only you can determine which one is right for you.  Weigh your decision carefully; make the one that’s right for you and you’ll be on the road to financial freedom in no time.