Why a Credit Counseling Program Takes Longer to Complete and Costs More Than Debt Settlement

Key Takeaways
  • Credit counseling and debt settlement are both debt relief options that can save you money on your existing unsecured debts.
  • Both options require you to close enrolled accounts.
  • Both options will negatively affect your credit score.
  • Credit counseling requires you to repay 100% of the balance owed, where debt settlement negotiates a lower payoff.
  • Credit counseling requires you to repay balances within five years, where debt settlement could eliminate debt in as little as three years.

You pay your ‘regular’ bills on time. But you can only afford to make the minimum monthly payments on your credit card accounts. In most cases, making only the minimum payment each month and continuing to make purchases causes your balances to increase each month. These outstanding balances build up over time and that’s when things can turn ugly.  

There is a feeling of despair just trying to get by month to month. You watch $1,000 or more drain from your monthly budget, barely making the interest payments on your unsecured debt. 

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So, at the end of the month, while you did pay your bills and the minimum required payments on all your credit card accounts, there is no money left for savings, retirement, or even a long-awaited vacation.   

After months, or maybe even years, of struggling to eliminate your credit card balances, you finally decide to seek out help from a professional. What type of professional help though? Credit Counseling or Debt Settlement?  Let’s take a look. 

Credit Counseling or Debt Settlement – Here is what you need to know:

Creditors promote credit counseling because it means that the lender will receive 100% of the balance due, plus some interest and late fees. But is that really the best route for you?

There are some important differences between the two programs, which will impact how long it takes to get out of debt and how much it will cost you to pay off your balances in full. 

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First, let’s look at Credit Counseling:

How Long Does Credit Counseling Take to Complete and How Much Does It Cost?

Credit counseling companies typically offer free counseling, budgeting, and financial education to improve your money management skills. Before making a program recommendation, the counselor will review your income, debts, credit report, and credit score. 

In many cases, they advise a debt management plan (DMP), which repays your creditors in full plus some of the interest. You make a single payment to the company, and they redirect payments to the creditors. 

Most credit counseling companies operate as non-profit entities. However, their non-profit status does not mean they offer impartial advice. Most of the revenue a credit counseling company receives to administer a debt management program is actually paid by the credit card companies.   In addition to the revenue paid by card companies, credit counselors also charge monthly fees to their clients for administering their debt management programs and dispersing payments to creditors.  

A debt management plan will last a maximum of five years. In many cases, you will have to make higher monthly payments to meet the five-year payoff deadline. Compared to making minimum monthly payments to pay off your credit card balances, you may save some money in a debt management plan because the credit counselor will seek to lower your interest rates and waive late fees and penalties, however, your interest rates will likely remain in the high single-digit to the low double-digit range. 

Now, let’s look at Debt Settlement:

How Long Does Debt Settlement Take to Complete and How Much Does It Cost?

Debt Settlement companies begin with an initial assessment of your finances. The debt counselor will evaluate your income, your current debts, your credit report, and credit score. They also discuss your short-term and long-term financial needs and goals before recommending a solution. 

If you elect to enroll in a debt settlement program, the counselor will work with your creditors to negotiate a lower payoff rather than a lower interest rate. In this way, you save money because you pay less than the full balance owed, without the risk for further collection efforts by the creditor once they have agreed to a settlement plan and you have completed all the required payments under the plan. Even when you include late fees and interest, the reduced amount can save you thousands of dollars. 

If you complete the debt settlement program, you can achieve debt elimination in as little as two to five years because you are paying significantly less than the original balance on the same budget. Even with debt balances over $25,000, you can lower your monthly payments while settling the debt in three or four years.  

Final Thoughts on Both Credit Counseling and Debt Settlement

Credit counseling programs many times take longer to pay off all your credit card debts and cost more because they require you to repay 100% of the debt plus interest during the term of the debt management plan. Debt settlement reduces the overall debt balances owed, often resulting in a shorter payoff schedule. 

Both programs do allow you to make larger payments or a lump sum payment, which could lead to faster debt elimination at an even lower cost. 

  • Is debt settlement better than credit counseling?

    Debt settlement can cost less and reduce the amount of time it takes to eliminate credit card debt or other unsecured bills. The program works because you set aside money in an FDIC-insured savings account until you have enough saved to negotiate a lump sum payment to creditors, giving you leverage in the settlement negotiations.

  • Do debt-relief programs hurt my credit?

    Yes. Any debt relief program will temporarily damage your credit. Both credit counseling and debt settlement require you to close enrolled accounts, which will result in a lower credit score. You can improve your credit quickly if you keep any remaining open accounts current. 

  • What is the difference between credit counseling and debt settlement?

    Credit counseling enrolls debt into a debt management plan or DMP. You make a single payment to the credit counseling agency and they repay creditors based on a predetermined plan. You have five years to repay 100% of the balances owed and save money through lower interest rates and waived fees. Debt settlement enrolls debt into a program while you make monthly contributions to a Program Savings Account. The amount due each month is about half of the minimum monthly payments you currently pay creditors. When you have enough saved, the company will negotiate debt settlements with creditors to save you money. You can eliminate debt in as little as three years.