Credit card debt is easy to rack up but hard to get rid of. You may have heard of debt settlement and debt consolidation, two popular strategies to help get out of the red. But while they sound alike, they're quite different.
CNBC Select explains how debt consolidation and debt relief work, how to choose which is right for you and other solutions to consider.
Debt consolidation vs. debt relief
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According to National Debt Relief, clients who complete its debt settlement plan can reduce their enrolled debt by an average of 20% to 25%, after fees.
Freedom Debt Relief has resolved over $20 billion in outstanding debts since 2002. It offers free credit card debt relief consultations.
What is debt consolidation?
Debt consolidation involves combining multiple debts into one, usually by taking out a debt consolidation loan. A single monthly payment can be a lot easier to manage.
Some people will use a balance transfer card to move a balance from a high APR card and avoid paying interest for up to two years. The Wells Fargo Reflect® Card gives you a 0% intro APR on purchases and qualifying balance transfers for 21 months from account opening (17.49%, 23.99%, or 28.24% variable APR thereafter).
You'll need to pay a balance transfer and be sure to pay off the new balance in full before the zero APR period expires, or you'll only add another high-interest debt.
The Wells Fargo Reflect® Card can help you save on interest charges thanks to its extra generous intro-APR offer on purchases and qualifying balance transfers.
Highlights
Highlights shown here are provided by the issuer and have not been reviewed by CNBC Select's editorial staff.
- Apply Now to take advantage of this offer and learn more about product features, terms and conditions.
- 0% intro APR for 21 months from account opening on purchases and qualifying balance transfers. 17.49%, 23.99%, or 28.24% variable APR thereafter; balance transfers made within 120 days qualify for the intro rate, BT fee of 5%, min: $5.
- $0 annual fee.
- Up to $600 of cell phone protection against damage or theft. Subject to a $25 deductible.
- Through My Wells Fargo Deals, you can get access to personalized deals from a variety of merchants. It's an easy way to earn cash back as an account credit when you shop, dine, or enjoy an experience simply by using an eligible Wells Fargo credit card.
Balance transfer fee
5%, min: $5
Foreign transaction fee
3%
There are also debt consolidation loans from banks and other lenders, which typically have a lower interest rate than a credit card.
Many lenders will pay off your creditors directly, leaving you with a single monthly payment with a fixed interest rate. .
Offers in this section are from affiliate partners and selected based on a combination of engagement, product relevance, compensation, and consistent availability.
7.99%–35.99%
Up to $50,000
9.95% to 35.99%
$2,000 to $35,000
What is debt relief?
Debt relief, also known as debt settlement, is the process of negotiating with creditors to forgive all or some of your debt. Typically, people sign up with a debt relief company that negotiates on their behalf.
The process isn't free: Debt relief companies can charge as much as 25% of your enrolled debt. And it's not guaranteed, either: If the company fails to reach a deal with your creditor, you could face additional interest and penalties, and even legal action.
Either way your credit score will take a major hit during the debt relief process. But for many clients, its worth the trade-off to be back in the black faster
We like New Era Debt Solutions, which has decades of experience and has high rankings for customer satisfaction
Find a debt relief company that works for you
Is debt consolidation or debt relief right for you?
When comparing the two options, here's what to consider:
- Fees: Balance transfer cards typically charge a balance transfer fee of 3% to 5%. Some debt consolidation loans come with origination fees which can be up to 8%. But if you're working with a debt settlement company, you can expect to pay between 14% and 25% of the total debt you enroll.
- Debt relief can hurt your credit score. While negotiations are ongoing, all the missed payments will appear on your credit reports. Payment history is the most crucial credit score factor, so multiple late payments could tank your credit for a time.
- Debt consolidation requires a better credit score: If your credit has already taken a hit from your mounting debt, you might not be able to get approved for a 0% APR balance transfer card or debt consolidation loan. Debt settlement services typically don't have credit score requirements.
- You might not have enough debt for debt relief: Most debt relief companies only work with clients who have at least $7,500 or $10,000 in unsecured debt. In addition, any account you enroll in the program will be permanently closed.
Debt consolidation is a better strategy if you good credit and the financial discipline to make timely payments.
Debt relief might be a better option if you're seriously in debt and want to avoid declaring bankruptcy.
If you need help deciding on a solution, you can connect with a non-profit credit counseling agency where a certified counselor can analyze your financial situation and give you recommendations.
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Why trust CNBC Select?
At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every debt relief article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of debt products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See our methodology for more information on how we choose the best credit products.
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