Debt Arbitration and Credit Counseling Compared

Both debt arbitration and credit counseling offer you help when you have debt problems. Many people get these two things confused, although they are completely different debt solutions. Here are the basics of debt arbitration and credit counseling and how they compare to one another.

Debt Arbitration

The debt arbitration industry centers around a process known as debt settlement. With this process, you will be able to settle your old accounts individually with your creditors. A debt arbitration company is a third party that works on your behalf to help you settle debts. Most of the time, this will involve making a one-time lump sum payment to a creditor. Typically, the creditor will take less than what is actually owed to them.

Credit Counseling

Credit counseling is another process that you can undergo if you are having debt problems. With credit counseling, you will work with a credit counselor in order to help resolve your debt issues. They will look at your debt situation with you and try to educate you in debt matters. They will help you avoid taking on extra debt and provide you with a solution to pay off your existing debt. Credit counselors work in conjunction with credit card companies and will set up a debt management plan for you. The credit counseling company will negotiate a lower interest rate on your credit cards and other accounts. You will then make one monthly payment to the credit counseling company, and they will pay your creditors for you. With this system, you will be paying the full amount of your debt; however, you will be paying a lower interest rate.

Impact on Credit

Both of these solutions will affect your credit score in some capacity. However, debt arbitration will typically hurt your credit worse than the credit counseling process. With debt arbitration, you are essentially not living up to your end of the bargain that was agreed upon in the original contract with your creditors. You are paying them less than what you owe them, and this will not reflect favorably in your credit report. With the credit counseling process, it will hurt your credit, but the impact will be minimal. You will still be paying the full debt that was owed. Many times, you can actually help your credit by making regular payments if you have been in the habit of missing payments.

Third-Party Affiliation

With both credit counseling and debt arbitration, you will be working with a third party in order to deal with your debt problems. However, one of the key differences in these two methods is who the third party is working for. In the case of debt arbitration, the third party is working independently and on your behalf. With credit counseling, the third party is working with the credit card companies on their behalf. While they might make it seem as though they are trying to help you, they are actually on the credit card company's payroll in order to collect debts that might otherwise go unpaid.

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