Difference Between Debt Negotiation and Credit Counseling

Debt negotiation and credit counseling both can offer financial solutions to people who are deeply in debt, but they differ in the way that those solutions are reached.  When consumers have racked up more bills than they can hope to pay and are in a pattern of skipping payments, making late payments, and being charged high fees for these actions, choosing to take an extreme measure such as debt negotiation or credit counseling may be necessary and wise.  Though both will affect your credit score in the short run, the chance is good that your score is already low and ultimately, in the long run, debt negotiation or credit counseling will allow your credit score to be higher than it would have been had you not entered into the counseling or negotiation.

Both credit counseling and debt negotiation involve trying to come up with a plan to repay your debt.

• Credit counseling allows you to get various types of debt management help from professionals... usually for a fee.
• Debt negotiation requires you to try to negotiate lower payments, a payment plan or a reduced balance owed with credit card companies on your own.

All About Credit Counseling

• Credit counseling takes place when a consumer contacts a credit counseling agency for advice about and help in getting out of debt.  These are third parties who act as mediators between consumers and the credit card companies to which they owe money. 
• Rather than dealing with their lenders directly, consumers rely on credit counseling agencies to deal with the lenders and reach repayment terms acceptable to both parties.
• The agencies work with the lenders in attempts to come up with interest rates and monthly payments that are lower than what their clients were paying before.
• Lending agencies may be more likely to agree to these lower terms when working with counseling agencies than with borrowers directly because the fact that a borrower is working with a counseling agency means that a) the borrower is serious about making payments; and b) that the lender will see at least some of their money rather than none if it. 
• Once the repayment terms have been reached, clients make one payment to the credit counseling agency, which then pays the various lenders. 
• Counseling agencies can be not-for-profit or for-profit organizations.  Non-profit agencies are recommended because they are more likely to be honest and have the consumer’s best interest in mind.  Some agencies offer services for free, while others charge up-front fees, which may be difficult for borrowers already deep in debt to scrape together.

Things to Know About Credit Counseling

• Interestingly enough, credit counseling agencies are funded in part by the credit card companies they help lenders repay.
• Initially this funding relationship seems odd, but it makes sense when you realize that it is advantageous to the creditors to be members of counseling agency networks, because those agencies help the creditors regain at least some of the money they loaned out.
• However, this system has been criticized because of alleged conflicts of interest; it has been questioned whose best interest counseling agencies have in mind – the creditor or the borrower.

National Foundation for Credit Counseling

The National Foundation for Credit Counseling is a non-profit organization that employs Certified Consumer Credit Counselors at member agencies across the country.  These counselors provide free and low-cost counseling that will help you evaluate your current situation, identify your spending, determine if you make enough money to cover your necessary living expenses, create a budget, and make a plan of action to deal with your debt.

Debt Negotiation

• Debt negotiation takes place either by the borrower contacting lenders directly and working out a repayment plan, or by using a debt negotiating service. 
• Similar to the credit counseling idea, borrowers will try to get lenders to give lower interest rates and to accept less than what is owed.  However, the plan is usually a bit different from those offered by credit counseling services, in that rather than repaying small amounts to each lender each month, the borrower saves up a sum of money over a certain period of time – often half of what a lender agrees to accept - and then makes a large payment to that lender. 
• Debt negotiation works best dealing with one debt at a time- pay off one first, usually the one with the highest interest rate, and then move to the next one.  As you go, your credit score will gradually improve because at least some accounts will be paid as agreed upon.  And unlike credit counseling agencies, debt negotiation services are not in a steady relationship with credit card companies; they are working strictly for the consumer.