Improving Your Finances: Debt Settlement vs. Credit Counseling vs. Credit Repair

If you’re struggling with improving your finances, you may have seen several different services offering to help. Each type of service has a different goal, so picking one over the others could change the amount you have to pay toward your debt, and the impact on your credit score may vary by service. Which service you should choose depends on your debt, your goals and budget.

Improving Your Finances

What Are the Basics?

While the broad goal is to improve your financial situation and credit score, each service has a different primary purpose.

  • Debt settlement seeks to reduce the amount you have to pay. This could be by offering a lump sum payment for pennies on the dollar or negotiating a payment plan that won’t pay off the full debt.
  • Credit counseling works on improving your finances  by helping you develop better habits like sticking to a budget and finding ways to pay off your debt as quickly as possible. It may also help you do things such as negotiate for lower interest rates, find a personal loan and use balance transfers, but in most cases, the end goal is to pay off your debt in full.
  • Credit repair focuses primarily on your credit score and removing negative items from your credit report. Paying down your debt may be part of this, but it is only one possible tool, not the ultimate goal.

Is One Type of Service More Legitimate Than the Others?

Many providers who only offer one of the debt settlement, credit counseling or credit repair services will try to diminish the other two services, even to the point of implying that they’re a scam. The truth is that as long as you pick a reputable company, each type of service is perfectly legitimate.

Of course, because the different services have varying methods and potential outcomes, there could be one that is better for improving your finances than the others.

Does the Amount of Debt Matter?

Certain programs may set minimums or maximums for the amount of debt they’ll work with, but the rules aren’t set in stone. There are a few general guidelines to consider:

  • If you’re struggling but still able to make at least your minimum monthly payments each month, credit counseling may help you find a little breathing room without damaging your credit score.
  • If you can’t keep up with your payments but haven’t taken a big credit score hit yet, debt settlement may help minimize the damage.
  • If you’ve already gone into default, had an account charged off, or entered or considered bankruptcy, it may be time to shift your focus to credit repair.

What Happens to My Credit Score?

In terms of credit scoring, there are clear winners and losers when it comes to improving your finances.

  • Credit counseling: Because credit counseling focuses on finding ways to pay your debt in full, it will not hurt your credit score and may actually help you to build positive credit history over time. Even if you negotiate lower interest rates or transfer balances, it still counts as a paid-in-full account.
  • Debt settlement: Debt settlement will almost always lower your credit score. Since the creditor loses money on a settlement, settled accounts are marked negatively on your credit report. However, continuing to add missed payments or having an account charged off could lower your credit score even more.
  • Credit repair: In theory, credit repair can only raise your credit score, but that only tells part of the story. If you switch into credit repair mode before your accounts are paid, settled or discharged in bankruptcy, additional negative items could still be added to your credit report.

How Long Does it Take?

There are no clear-cut answer for the amount of time it will take improving your finances and each service. It varies widely based on your exact situation.

  • Credit counseling often involves either one-on-one sessions or attending classes. Depending on the timing and how quickly you’re able to follow their suggestions, you could start seeing results in days or weeks. Bigger changes, and actually paying your debt completely off, could take months or even a few years.
  • Debt settlement depends entirely on the status of your account. If you have an account in collections with a debt collector willing to settle, it may take a single phone call. If you have a high credit card balance but have managed to make your minimum payments on time, the issuer may require you to enter into a special program before they’re willing to settle. Overall, expect anywhere from a few weeks to a few months.
  • Credit repair is another process that can take anywhere from days to months. Creditors have 30 days to respond to credit bureau disputes or updated information on an open dispute. Some may fix obvious errors faster, but there is often a processing backlog that pushes them right up against the deadline. If you’re trying tactics like goodwill letters or pay-for-deletes, expect several rounds of back-and-forth letters or phone tag.

Which Should I Choose?

When you consider the above information and how willing you are to spend your limited free time, the answer may be all three. Remember, credit counseling will help with improving your finances by teaching you good spending habits, debt settlement will help with debts you can’t pay in full and credit repair will help reverse damage to your credit report. Whether you need one, two or all of these services, you are free to customize a plan that meets your needs.

Sources:

  • https://www.experian.com/blogs/ask-experian/the-difference-between-credit-counseling-and-debt-settlement-2/
  • https://www.consumerfinance.gov/ask-cfpb/whats-the-difference-between-a-credit-counselor-and-a-debt-settlement-company-en-1449/
  • https://www.consumerfinance.gov/ask-cfpb/what-is-credit-counseling-en-1451/
  • https://www.consumerfinance.gov/ask-cfpb/what-are-debt-settlementdebt-relief-services-and-should-i-use-them-en-1457/
  • https://www.consumerfinance.gov/ask-cfpb/a-credit-repair-firm-sent-me-an-offer-outlining-their-credit-repair-program-should-i-enroll-en-327/
  • http://blog.quizzle.com/2010/09/debt-consolidation-vs-credit-counseling-which-is-right-for-you/
  • http://www.bankrate.com/finance/debt/debt-management-vs-settlement.aspx

Can You Buy a House With Bad Credit?

Buying a house is a dream many people have, but it can seem out of reach when you have bad credit. While it’s certainly easier to qualify for a mortgage loan with a credit score of at least 620, it’s not impossible if your score is lower. You just have to prove to lenders that you’ll pay your mortgage on time every month for years, and having a good credit score is only one way to do this. If you’re hoping to become a homeowner without first having to spend years improving your score, take a look at some of your options.

Bad Credit Buy House

Bad Credit? Check Your Credit Report for Errors

Your first step is to get a copy of your credit report. You might be surprised by your score, as it could be higher or lower than you assumed. Be sure to look over the entire credit report, because you might find an error, such as a bill in collections that you actually paid. If you do find an error, report it right away to the creditor so you can get it removed from your credit report before you get a mortgage.

If your score is low and you are getting ready to look at houses, you have a chance of improving your bad credit at least a little in the next few months. Start by making every payment on time, and then pay down any credit cards that have high balances. If you have a late payment on your credit report, try contacting your creditor to see if you can get it removed, as this is a possibility if you’re a loyal customer and are not normally late.

Similarly, if you have collections on your report, ask the creditor if you can pay the amount past due in exchange for the collections being removed from your credit report. In some cases, even boosting your score by as little as 10 or 20 points can make a difference, since it might take your score from poor to fair.

Make a Big Down Payment

If your credit score still falls into the bad or poor category when you’re ready to buy a house, rest assured you can likely still get a mortgage loan. You just might have to pay more upfront. Making a big down payment can help you get a loan, because it reduces the amount of money you need to borrow. This makes it more likely that you’ll be approved.

In addition, if you put down 20 percent or more, you should be able to avoid private mortgage insurance (PMI), as you typically have to pay this monthly if you put down less than 20 percent. And of course, the more money you put down on the house now, the less you’ll end up paying in interest over time. So there are benefits to saving up a good down payment, regardless of what your credit score is.

Look for a Loan That Doesn’t Require Good Credit

Typically, mortgage loans require you to have a credit score of about 620 or more, which is why buying a house when you have a lower score can be challenging. However, it’s not impossible, in part because there are loans that don’t require a score of 620 and up. They don’t require a large down payment, either.

FHA loans are a good example of this type of loan. This loan is backed by the Federal Housing Administration, which makes lenders more willing to offer money to borrowers with bad credit, as the loan will be repaid either way. With an FHA loan, your credit score can be as low as about 580. You just have to have a down payment of 3.5 percent, which is still much lower than the typically recommended 20 percent. This is why FHA loans are usually appealing to homebuyers who have bad credit.

Show Lenders Why You Should Get a Mortgage Loan

Typically, lenders use computer systems with algorithms to determine which homebuyers are eligible for mortgage loans. This is why it’s easier to get a mortgage loan when your credit score is high. However, it’s not all about the algorithm. Many lenders are willing to overlook low credit scores if you have something else to offer as a borrower.

For example, if you have a great rental payment history, let your lender know, since this shows you’re likely to make your mortgage payments on time. And if you have a lot of money in savings, such as enough to pay your bills for about six months, show proof of this to your lender. This suggests that even if you lose your job or suffer other financial setbacks, you’ll still be able to pay your mortgage, and that’s what’s most important to lenders considering letting you borrow money for a house.

As you can see, you definitely have options when it comes to buying a house with bad credit. But if you’re not in a rush to buy right now, it’s a good idea to spend some time and effort improving your credit score. You can even contact a credit repair company for help getting started. After all, the higher your score is, the more options you’ll have when it’s time to buy a house.

Source:

https://www.nolo.com/legal-encyclopedia/five-reasons-make-large-down-payment.html

https://www.credit.com/credit-repair/credit-repair-content/dispute-credit-report-error/

https://www.hud.gov/buying/loans

7 Money-Saving Tips to Keep Your Finances on Track

Are you someone that lies awake thinking about your credit card balance? Do you consider how late payments are affecting your credit score — or why you cannot seem to be saving any money? If you are often dipping into your overdraft, constantly living in the ‘red’ — it’s time to take positive action.

Money Saving Tips

You Can Improve Your Current Financial State

Regardless of your current financial state, you can experience a more stable financial future. In order to become financially independent, however, you must begin living on less than you earn — period. Even if you are in debt, you must live by this rule.

Just remember, it’s not the amount of money that makes you ‘rich’ — it’s how you manage that money. As you learn to acquire good finance habits and develop more effective money management skills, you too will experience greater financial freedom.

Seven Money-Saving Tips to Improve Your Finances

When you make a plan, you’d be amazed at what you can achieve. As you begin to accomplish small goals, you will gain greater motivation and self-confidence. You can take action today, improving your financial health for years to come.

1. Budget for expenses and saving

You need to sit down and crunch some numbers. Although your situation may be unique, the 50/30/20 rule is often useful. The concept here is that 50% of your income should be spent on the essentials, such as your fixed expenses; 30% should be used to purchase additional desired living expenses and optional extras; followed by 20% to pay off debt and to save.

Top tip: Make a spreadsheet based on your fixed (mortgage payments, utilities, car payments, etc.) and variable expenses (groceries, entertainment, gas, etc.) in relation to your income. This will help you see where you need to cut back so that you can tackle your debt and begin saving.

2. Reevaluate your bills

Although 10 extra dollars here and 15 extra dollars there may not seem like a big deal, it all adds up at the end of the month. Here are a few tips to get you back on-track:

  • When it comes to your utility bills, start comparing. If you are already with the best energy provider, then it’s time to become more energy efficient. Begin researching some of the top energy-saving tips, as outlined by the Department of Energy.
  • In relation to communications, be aware of where your money goes. Do you exceed your monthly mobile allowance each month? Then perhaps it’s time to switch to a package that makes more sense for your needs. Better yet, bundle your mobile phone, internet, and cable services for instant savings.

3. Effectively target your debt so that you can save

When aiming to save money, it may seem counterintuitive to address your debt — but this is a very important step. If you have debt that’s accumulating interest in the background, what’s the point of saving? Begin with the most expensive debts first, including credit cards and other loans that incur high penalties.

Prioritize, and when the most expensive debt is clear, you’ll already be in the habit of transferring x-amount each month. With your debt gone, those funds can now be transferred into a savings account. However, there isn’t a one size-fits-all strategy, so if you’re struggling to get out of debt and improve your credit score, you may want to consider professional credit services to get back on-track.

4. Learn to minimize

Your budget will quickly show where your money is going. Whether you often shop at department stores or love to shop online, it’s time to cut back. Spending, spending, and spending some more actually distracts us from what’s truly important to us. Get rid of clutter, sell off items you no longer need, and put that money into a savings account. You’ll feel like a major weight has been lifted from your shoulders.

5. Quit spending money you don’t have

Credit cards can be great — they can help you make timely payments and even gain cash back. But if you’re spending frivolously, your debt can quickly spiral out-of-control. Always remember that golden rule, ‘do not spend more money than you earn.’ If you only make $3000 a month, but are spending an average of $5500, you can clearly see where the problem lies. At that rate, you’ll not only go into deeper debt, but you’ll never be able to save a penny.

6. Save a little each month

Even if you make $25,000 a year, it’s still possible for you to save a substantial amount by the time you reach retirement. Equating to just over $2080 a month, if you saved $180 of that each month, after 50 years, you will have an additional $108,000. If you can’t imagine putting away $180 of your monthly income, then you need to revisit your budget and change your personal financial habits. Everyone can save — the difference is, not everyone can save based on their current spending habits.

7. Take advantage of customer reward programs

No matter where you live or where you shop, there are retailers that will reward you. Focus on places where you shop regardless — such as your local grocery store. Do they offer a points program? If you are spending $100 on your family’s groceries, you may as well benefit. In many cases, you’ll be able to use these points to get free groceries. Also, don’t be shy to coupon!

As you make small improvements each day, these will quickly add up, allowing you to develop better financial habits. And remember, having stacks of cash in the bank isn’t freedom — but being in control of what you have certainly is.

Sources

http://www.independent.co.uk/money/spend-save/a-step-by-step-guide-to-cutting-all-your-bills-913125.html

http://www.thesimpledollar.com/little-steps-100-great-tips-for-saving-money-for-those-just-getting-started/

http://uk.businessinsider.com/save-money-pay-debt-2017-6