Comparing Debt Consolidation vs. Debt Settlement

Debt consolidation and debt settlement are both options for resolving debt.  However, each method has a different strategy and timeline before you are free of debt. They each can affect your credit score differently.

 Debt Consolidation

Debt consolidation is a debt management strategy in which you combine multiple debts into a single payment, with a lower interest rate.  You can use a balance-transfer credit card, debt consolidation loan, home-equity loan or 401(k) loan. 

Why You Might Choose It:  

  • To get a lower interest rate than you’re currently paying, which saves you money and can help you pay off your debt sooner.
  • To reduce the number of creditors you owe and therefore the number of payments you’re juggling. 
  • Debt consolidation loans may allow you to use assets like your home or car as collateral.

What You Need To Know:

  • Debt consolidation can lead to a small dip in your credit score typically by a few points when a lender performs a hard inquiry on your credit. 
  • You’ll have a longer period of time before you’re debt free.

Debt Settlement

Debt settlement is the process of negotiating with creditors (usually credit card issuers) to reduce the amount you owe in exchange for a one-time lump sum payment to settle the account.

Why You Might Choose It: 

  • Your income is stable enough that you can continue to pay your mortgage or rent and other essential bills in addition to the payments required under a debt settlement.
  • To avoid court-mandated controls of bankruptcy while still lowering the amount of debt you have to pay.
  • Creditors know you can always file for bankruptcy, which could eliminate their ability to collect anything from you which is why they might be willing to accept less.

What You Need To Know:

  • Typically, only unsecured debts can be settled. Unsecured debts include medical bills and credit card debt; but not public student loans, or secured debt (i.e. auto loans or mortgages). 
  • The process of debt settlement requires you to stop making payments on the accounts you want to settle which can damage your credit score.  Typically from 75 – 100 points.
  • Debt settlement will be on your credit report for seven years and can impact your ability to get a loan and the interest rate you pay, if you are approved.

Tackling debt can be an important financial and personal goal. If you have any questions about either of these debt relief methods call me at (800) 822-7120.  I can help!

-Erik Kaplan

What happens if I can’t pay my credit cards?

When you’re faced with a sudden disruption in your income – something millions of people are experiencing because of the COVID-19 pandemic – credit cards often become a necessity for survival.

 

When plastic is your only option make sure you investigate if and how your credit card company is offering some leniency to those in a financial crisis. Such support could include flexible bill payments and waived late fees.  Your options will vary based on the credit card company and your history as a customer.

 

Many card issuers do offer forbearance programs, which act as temporary relief during financial hardships. While each forbearance program is different, you can typically expect to receive assistance with monthly payments and possibly lowered interest. If you do go this route, your account may continue to accrue interest, but the lender won’t report the late payments to the credit bureaus. Which means there won’t be a negative effect to your credit score.

 

Keep in mind that you have to opt-in to a forbearance program. If you simply skip payments without speaking to your card issuer, your credit score will be affected.

 

Another option to help protect your credit score is to request that your lender includes a statement on your account that indicates you have been affected by a natural or declared disaster. Experian has stated this can help protect your credit history and scores.

 

If you need help during this time, please email me at erik@thdcreditconsulting.com with any questions you may have.

-Erik Kaplan

When Should I Ask for a Credit Limit Increase?

It is not always in your best interest to request a higher credit limit, or credit line increase, mostly because there are consequences. A credit line increase request can trigger a hard inquiry on your credit report, which can have a negative impact on your credit score by a few points.

On the other hand, there are situations where it can be quite helpful to request an increase. 

Here are guidelines:

  • Your credit score is strong: If you have a higher credit score than when you first got the line of credit and you’ve been repaying it on time each month, it is a good time to ask for a credit limit increase.
  • You have good repayment history with the issuer: When you have shown the ability to repay debt and payments are on time you are demonstrating responsible behavior with the card issuer.
  • When your income increases: Showing an increase in income can help get approved when requesting a credit limit increase. 

The best reason to increase your credit limit on your credit card is so you can maintain a low credit utilization rate, which can help increase your credit score. If you can be purposeful with the increase, another good reason is to have a higher credit limit for unexpected expenses such as an emergency.

If you have questions about when to increase your credit line or how to improve your credit score then reach out to our team of experts at asktheexpert@thdcreditconsulting.com.

-Erik Kaplan

You might be a prime candidate for credit repair, and not even know it.

Have you been living with bad credit? Are you unsure of your credit standing but have a sneaking suspicion it’s not the best? Here are 5 signs you need credit repair:

 

You have a credit card balance

You typically make minimum payments and rarely pay attention to the overall balance. It’s easy to get stuck in this financial trap, and long-term debt can hurt your score. As your credit utilization ratio rises, so can your credit damage.

You were denied for a loan

Loan denial alerts you to a problem with your credit or your financial situation.  Use this opportunity to get the problem fixed. Your next step should be to take actions that will improve your credit score.

You occasionally forget to pay bills

Forgotten or late bills can send your credit score plummeting. You might think or hope that a small unpaid bill wouldn’t matter. Sadly, you’re probably wrong.

You have no credit history

If you’ve never had credit and don’t have a credit score, that doesn’t mean you have a zero credit score. You have the absence of a score: You’re “credit invisible.”  THD Credit can help you begin your journey of establishing your credit.

You don’t know your credit score

If you subscribe to the “out of sight, out of mind” mantra just know it isn’t sustainable when it comes to credit health. This magical number says a lot about your credit worthiness. It can either save you money or cost you money. Keeping track of your scores is essential to the process of repair and maintenance.

Realizing you need credit repair is not a negative.  In fact, consider the benefits and how it will positively impact your financial health in the future.

 

-Erik Kaplan

Coming Soon!

What happens AFTER you file for bankruptcy?

Keeping track of your credit is a crucial step in rebuilding your credit profile, especially after a bankruptcy.  Let’s take a closer look at what happens, after the dust has settled.

Q:  What happens AFTER you file for bankruptcy?

THD Expert:  When you file for bankruptcy, the law says that you must list all of your debts, even if you plan on continuing to pay them. You pick and chose what debts you want to continue paying- such as the house if you want to live there or your car if you need it to get to work.  But you don’t pick and chose what debts are covered.  When a creditor is notified about your bankruptcy, they then report to the credit bureaus that a particular loan was “included in bankruptcy.” At that point, creditors stop reporting the payments you continue to make, such as for a mortgage or car payment. This explains why payments don’t show up on credit reports.

Q:  So why is the information on your credit report wrong?

THD Expert:  If the credit bureaus worked for you and me, rather than the creditors, it would probably look more like this: The credit bureaus would report your house payments as long as you are current, but they come off if you get behind. Unfortunately, we don’t make up the rules. 

Q:  How can you make credit bureaus report your payments?

THD Expert:  Start off by requesting a payment history from your lenders (such as the mortgage company or car finance company), and use it to dispute the incorrect entries. Lenders are required by law to give you a payment history once per year if you request it.  Next, take this payment history and use it to dispute the missing payments on the loan with each of the 3 credit reporting agencies (Equifax, Experian  and TransUnion).

Unfortunately, you may have to do this every year as the lender may not start reporting your payments even after you have successfully disputed it.

Now that you know why payments are not showing up after filing for bankruptcy and what you can do about, you can take steps to fix it. 

If you’re need help, or have additional questions give me a call or email me today.

Erik Kaplan
CEO, THD Credit Consulting
erik@thdcreditconsulting.com
Phone: (800) 822-7120

Do you have questions you would like to submit to the THD Credit Experts?  Email your question to: asktheexpert@thdcreditconsulting.com

Coming Soon!