| For people who are carrying too much debt and are | | | | If your account has already gone to a collection |
| having difficulty making their payments, debt | | | | agency, you may need to make a lump payment to |
| consolidation or debt settlement can be viable options. | | | | the collection agency before the credit card company |
| While it is generally known that falling behind in your | | | | will offer you a settlement. |
| payments or missing payments will result in damage to | | | | What effect will settling have on your credit score? |
| your credit rating, many people are unsure how debt | | | | Closing your own account is not a negative action. The |
| consolidation or debt settlement will affect their credit | | | | three credit reporting bureaus (TransUnion, Experian, |
| score. To see the ramifications, let's begin by | | | | and Equifax) offer credit management advice on their |
| understanding the two processes. | | | | websites. They recommend that you do not cancel |
| Debt Settlement | | | | several accounts at the same time. Close one |
| Let's say you have three credit cards with a total | | | | account, make your payments, and check your credit |
| balance of $18,000. At an average annual percentage | | | | score. They recommend that if possible you keep the |
| rate (APR) of 23%, you must pay a minimum of $525 | | | | oldest account active, because the older the account, |
| per month to avoid default. It will take you 411 months | | | | the more positive weight it has on your credit score. |
| (over 34 years!) to pay off your debt, and you will pay | | | | Close newer accounts first. Also, don't |
| $33,844 in interest. If these numbers seem shocking, | | | | over-consolidate balances onto one card. You are |
| you can go to any free online credit card debt | | | | rated according to how much of your available credit |
| calculator website and run the numbers for your own | | | | you access. If your credit balances are more than |
| credit cards. | | | | 35% of your available limits, your credit score may be |
| There is a better way. Before you contact a debt | | | | negatively affected. |
| settlement company, try to settle your debts yourself. | | | | Debt Consolidation |
| To pay off an account, call your credit card provider. | | | | If you need to act quickly because you are facing |
| Say that you cannot make your payments and that | | | | severe financial difficulties, you may consider a debt |
| you want to close the account and pay off the | | | | consolidation loan or debt management counseling. |
| balance with a settlement. Say that if the card | | | | You may enter into an arrangement whereby you |
| company won't do this, you will default and they may | | | | write a check each month to the credit counseling |
| get nothing. Your credit card provider will make you an | | | | service, and they pay your creditors. The Fair Isaac |
| offer. Your account will be closed and you will be put | | | | Corp. (FICO) assures consumers that while a notation |
| on a payment plan. You must stick to your payment | | | | may be placed on your credit history, if you pay your |
| plan; if you fall behind, your credit card company will | | | | debts through a debt consolidation agency or |
| re-instate the penalty interest rate, which will be over | | | | credit-counseling agency your score will not be |
| 20%. But if you stick to the plan you will save yourself | | | | affected. |
| the $33,844 in the example above. | | | | |