If you’re struggling with debt and repossession or recently filed for bankruptcy and considering ways to repair your credit, chances are you’ve come across both debt consolidation and credit repair.
It can be confusing trying to decide which option is the best for you – do you go with a credit repair service or trust a debt consolidation company to handle your debt for you?
A 2022 study showed that 39.7% of high-credit-score borrowers took out a personal loan to consolidate debt, making the credit repair vs debt consolidation comparison even more important.
From our experience, credit repair and debt consolidation can work independently or alongside each other.
To simplify the two, in this article, we’ll discuss the advantages and disadvantages of both credit repair and debt consolidation to help you improve your credit score.
- Credit repair helps rebuild credit with new tradelines and dispute any inaccuracies
- Debt consolidation reduces the number of creditors into one loan
- Credit counseling reduces the number of creditors into a debt settlement program
- A debt settlement company (or yourself) can work with creditors to negotiate a debt settlement
|Solution||How It Works||Credit Bureau Impact|
|Credit Repair||Creates new tradelines and dispute inaccuracies||Improves credit score|
|Debt Consolidation||Consolidates multiple debts into one loan||Improves credit score|
|Credit Counseling||Consolidates multiple debts into a settlement program||Reported as “Credit Counseling”|
|Debt Settlement||Settles debt with creditors for a lower amount||Reported as “Debt Settlement”|
What’s The Difference Between Credit Repair vs Debt Consolidation?
Credit repair and debt consolidation are two different ways to help you improve your credit.
Credit repair, on the one hand, focuses on removing bruised tradelines and rebuilding new tradelines, while debt consolidation, on the other hand, combines all of your debts into one loan with a lower interest rate.
What Is Credit Repair?
Credit repair is a service credit repair companies offer to help you rebuild credit after previous credit delinquencies such as bankruptcies, missed payments, and outstanding debts.
This process involves creating new tradelines using non-traditional ways such as credit builder loans (that acts like personal loan), bill payments, and even debit cards.
Also, credit repair companies can help you dispute any inaccurate collections or missed payments showing on your credit report to remove bruised tradelines.
Credit repair aims to improve your credit rating so you can qualify for loans and credit cards with the best interest rates and rewards, respectively.
Advantages Of Credit Repair
- Improves credit score quickly
- Repair previous credit damage
- Establishes better relationships with creditors
- Easier to secure financing for future purchases
Disadvantages Of Credit Repair
- You must be disciplined enough to stick with the plan
- Fees are associated with credit repair services
- Some credit repair companies could be fraudulent
What Is Debt Consolidation?
Debt consolidation is a service debt management companies offer to combine all your debts into one loan.
This approach reduces your overall monthly payments and interest rates, making it faster to pay off your debt.
It’s also very useful to consolidate debt for people who have multiple high-interest-rate loans they need to keep track of.
Contact your creditors directly to negotiate better terms before reaching out to a debt consolidation company.
Advantages Of Debt Consolidation
- Easier to manage multiple payment plans into one
- Lower monthly payments
- Reduced interest rates
- Can help you pay off your debt faster
- Improve credit score over time
Disadvantages Of Debt Consolidation
- Can lead to more debt if not used properly
- You must be disciplined enough to stick with the plan
- Fees associated with debt consolidation services
- May need collateral, such as a home or vehicle, to secure a loan
What does the debt consolidation process look like?
The debt consolidation process starts with a conversation about your current financial situation with your lender.
This includes information on all your outstanding debts and their interest rates.
Your loan provider will then review your income and expenses to calculate whether the amount left over is enough to pay for the new consolidated loan.
Once your lender approves you for the debt consolidation loan, they will work with creditors to pay off your existing debts and then set up a payment plan for the new consolidated loan.
Most of the time, your old accounts will be closed once your lender pays off the debt.
At this point, make on-time payments for your consolidated loan, and you’ll quickly be debt free again!
Overall, debt consolidation loans reduce your monthly payments significantly compared to paying each debt separately.
What About Credit Counseling vs Debt Consolidation?
Credit counseling is a service credit counseling organizations offer to consolidate your debt into a debt settlement program.
Typically, credit counselors work with your creditors to eliminate almost all the interest owed on your existing debts, and even reduce your debts owed, in exchange for you to pay your remaining debt in full over a fixed payment schedule.
You’ll also learn sound credit and debt management advice from your credit counselor to maintain a good credit score moving forward.
The only tradeoff here is that for each settlement made, the creditor will report this back to your credit report as credit counseling on the tradeline.
Advantages Of Credit Counseling
- You can pay off your debt faster and with less money
- Credit counseling organizations will help you create a budget to manage your finances better
- Your credit score should improve over time since you’ll be paying off all of your debts and reducing the amount owed on each one
- You get professional advice from a certified credit counselor on how to improve your credit score and manage debt
- You can start rebuilding your credit immediately since most creditors will report the settlement as paid in full instead of a default or unpaid balance
Disadvantage Of Credit Counseling
- You may have to pay a fee for the credit counseling services
- Your creditors can refuse to enter into debt settlement agreements, leaving you with the full amount of your debts still owed
- It will take time and effort to find a reputable credit counseling organization that can help you negotiate with your creditors
- Your credit score may take a small hit in the short term due to the report of an account that was settled with a credit counselor
Key Considerations For Credit Repair and Debt Consolidation
Between credit repair, debt consolidation, and credit counseling, all of these options involve a company to help you either rebuild your credit or pay down your debt.
There is another option where you can do it yourself or work with debt settlement companies to help pay down your debt.
A Fourth Option: Debt Settlement
Debt settlement is another option to pay off your debt, as you can do this yourself (in person, by mail, or on the phone) or work with a debt settlement company.
This option allows you to reduce the amount you owe by eliminating all the interest accrued and sometimes even lowering the debt amount.
The good news is that you can pay off your debt much faster, but the missed payments will already be reported on your credit bureau.
Try negotiating with the creditor to remove the missed payment reported on the credit bureau during debt settlement to boost your credit score.
Be wary that sometimes creditors may play hardball and chose not to negotiate or give you a lowball settlement offer.
When that happens, stay consistent and explain how debt settlement helps the creditor recoup the money owed, and if all else fail, working with a debt settlement company can always do wonder.
Debt Consolidation vs. Debt Settlement: Which One Should You Choose?
From our experience, debt consolidation is always recommended simply because it avoids debt settlement being reported on your credit bureau.
Usually, when future creditors see a settlement made on your credit report, they may not be comfortable approving you for new credit or may approve you with higher interest rate offers.
Although debt settlement can pay off your debt quicker, debt consolidation loans operate in similar ways by lowering interest rates and your monthly payment without negatively impacting your credit report.
We consider debt settlement an option to help you pay off debts when you have a sudden loss of income.
Wrapping Up And My Experience With Credit Repair And Debt Consolidation
Credit repair is great for anyone to jump in and start rebuilding their credit while repairing old credit.
Debt consolidation complements the credit rebuilding process to help you pay off your debt faster.
From our experience, we highly recommend credit repair because they are simple and effective.
It’s also important to stay consistent in your plan and avoid overspending from your budget.
Remember, the different options mentioned here are only tools created to help you improve your financial situation, and the goal is to take advantage of the tools so you can enjoy the benefits of having improved credit.
Frequently Asked Questions
Is Debt Consolidation Bad?
Not at all.
In fact, it’s a helpful tool to help you consolidate your debt into a single loan without hurting your credit history.
You can improve your credit score in a few months as long as you consistently show good repayment history on your consolidated loan.
Does Debt Consolidation Hurt Your Credit?
No, it improves your credit.
You might see your initial credit score drop by a few points from opening the new consolidated loan, but your score will rebound immediately after since all your other debts will be paid and close from debt consolidation.
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