Best Relief for Credit Card Debt – Credit Advice or Debt Settlement?

While the US economy has suffered from the mortgage crisis, credit card debt is simmering as the next witches’ brew ready to bring its own potent poison to the table. Credit card debt has been out of control for years, but the situation has worsened as other forms of credit have dried up. Home equity is no longer a cash cow for working Americans, and rising unemployment rates are causing more and more people to max out their credit cards.

Credit advice and debt settlement

It’s no wonder, then, that organizations that help consumers pay off credit card debt are very busy, servicing thousands of new customers. There are two popular approaches to solving credit card debt problems – credit counseling and debt settlement.

Each helps clients by teaching them how to get and stay out of debt, but the approaches are vastly different. The goal of credit counseling is to pay off debt in full by negotiating lower interest rates, while debt service companies pay off debt quickly by negotiating reductions in amounts owed. Main differences are:

Credit advice:
1. Negotiate a reduced interest rate and pay off the full original balance
2. The client pays a monthly amount to the advisory service, which makes payments to the creditors
3. Monthly payments usually higher
4. Compensated by lender fees, 4-15%
5. More BBB Complaints
6. 83.9% of BBB complaints resolved
7. 21-26% reported success rate
8. Professional bodies: National Federation for Consumer Counseling (NFCC) and Association of Independent Consumer Credit Counseling Agencies (AICCCA)

Debt Settlement:
1. Negotiate reduced balances and then cash them out in full
2. The customer sets up a separate savings account and uses it to pay their own bills
3. Monthly payments usually lower
4. Compensated directly by customers, 10-15%
5. Fewer BBB complaints
6. 91.5% of BBB complaints resolved
7. 40-55% reported success rate
8. Professional association: The association of settlement companies

Different approaches to different problems

The biggest difference, however, is that these two approaches are designed to help people with different levels of debt. Consumers with less than $7,500 in credit card debt probably shouldn’t be considering debt settlement. In such cases, a credit counseling or do-it-yourself program would be a better approach.

But people who have racked up very high credit card debt may find paying off debt the best way to clear the deck and take back control of their lives. Firms that subscribe to the Association of Settlement Companies (TASC) standards aim to settle all balances within 12 to 36 months.

A necessary alternative to bankruptcy

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 all but eliminated personal bankruptcy for most Americans. With that option all but taken off the table, today’s consumer credit industry took on a new shape to meet the needs of consumers with exceptionally high levels of unsecured debt.

Let’s be clear about this: paying off debt isn’t for everyone, but it does provide a much-needed alternative to bankruptcy for people who, for whatever reason, are unable to meet their obligations. People who can’t even make the minimum monthly payments on credit card debt are unlikely to succeed with a credit counseling solution that requires even higher monthly payments.

criticism and comparisons

For an industry that has so much to offer the public, debt settlement has faced a lot of criticism lately, mainly for two reasons: 1) the industry is new (less than five years old) and not well understood; and 2) a few bad companies have tarnished the reputation of the majority of legitimate, highly ethical companies. The industry corrects both problems by raising the public profile to increase awareness and understanding and by weeding out the bad apples.

The credit advisory industry, led by the NFCC, has no hesitation in throwing stones at debt regulation, perhaps even challenging the industry’s right to exist. However, a quick look at the comparison above should alert readers to several concerns about credit advice. Two stand out in particular.

First of all, there is the question of who pays credit counseling centers. Some have observed that they appear to be well-mannered collection agencies to the card companies because creditors pay fees to them (which is not the case with debt settlement companies).

Then there is the issue of effectiveness. The success rate for credit counseling is 21-26%, well below the 40-50% reported for debt settlement. If your financial future was at stake, what would you choose?