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What Is the Difference Between Credit Counseling and Debt Settlement?

Dear Experian,

What is the difference between credit counseling and debt settlement?

- CKB

Dear CKB,

Credit counseling agencies can provide financial education and advice to help you better manage your credit and other personal finances. Credit counselors, usually part of a nonprofit agency, may work with your lenders to establish a debt management plan for you, but only after exploring other ways to manage your debts and improve your finances.

Debt settlement typically involves negotiating a reduced repayment amount with your lenders, typically for a fee paid to the debt settlement firm.

How a Debt Settlement Program May Affect Your Credit Scores

Entering into a debt settlement program usually results in the accounts being reported as "settled for less than originally agreed." A settlement is considered negative because it means you did not pay the lender the full amount they were owed. Because of this, accounts reported as settled are scored negatively by all credit scoring models.

If an account was never late prior to being settled, it will remain on your credit report for seven years from the date of the settlement.

In some cases, a debt settlement company may advise you to let current accounts become delinquent so they can negotiate a settlement with your lenders. Any late payments made on an account will remain on your credit report for seven years and will negatively impact your credit scores as well.

Be wary of organizations that pressure you to enter debt settlement programs and charge substantial upfront fees for their services, or that promise to remove accurate but negative information from your credit report. According to the Federal Trade Commission, negative information, if it is accurate, cannot be removed legally from your credit report prior to the time frames specified by law.

Additionally, the Credit Repair Organizations Act (CROA) specifies what a credit repair organization must do before accepting any payment. Be sure you understand your rights and legal protections before agreeing to pay for credit repair.

Credit Counseling Services and Your Credit Scores

In addition to budgeting, saving and credit management assistance and planning, many credit counseling services can also establish debt management plans (DMPs), which involve negotiating repayment plans with your creditors. As part of a DMP, you pay a single payment to the credit counselor each month, and they in turn pay your creditors. These plans may involve securing lower minimum monthly payments or lower interest rates. Depending on the plan, the debt may not be reported as settled for less than originally owed.

Such changes typically do not negatively impact your credit history as long as you continue to make all payments as agreed under the terms of the DMP.

Reputable credit counselors, such as those affiliated with the National Foundation for Credit Counseling, will require you to participate in credit counseling and education programs either before or as a requirement for entering into a debt management plan. They will be committed to helping you not only address your current debt problems, but will also help you avoid making the same mistakes again.

Thanks for asking.
Jennifer White, Consumer Education Specialist

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