Credit Repair vs. Credit Counseling vs. Debt Settlement

Credit repair: is the report accurate?

What it does: reviews your three credit reports and challenges information that is inaccurate, incomplete, unverifiable, duplicated, misdated, or past its reporting window. It does not reduce what you owe and does not touch accurate information.

What it costs: typically $70 to $150 per month, billed after work is performed, because charging in advance is illegal. What it does to your credit: nothing negative. Disputing does not lower your score. Who it is for: people whose reports contain errors, which is a large share of people. Who it is not for: people whose reports are accurate and whose problem is the amount they owe.

Credit counseling: restructure the payments

What it does: a nonprofit agency reviews your budget and, where appropriate, sets up a debt management plan. You make one monthly payment to the agency and it distributes to your creditors, usually with reduced interest rates negotiated in advance.

What it costs: the initial counseling session is typically free, with a modest monthly fee on an active plan. What it does to your credit: accounts on a DMP are often noted as such, and you generally close the enrolled cards, which raises utilization and can lower your score in the short term. Paying as agreed then rebuilds it. Who it is for: people who can service their debt on a restructured schedule and want a system. Look for an agency accredited by the NFCC.

Debt settlement: pay less, and take the hit

What it does: a company negotiates with creditors to accept less than the full balance. The typical mechanic is that you stop paying creditors and fund an escrow account until there is enough leverage to settle, which means months of deliberate delinquency by design.

What it costs: usually 15% to 25% of the enrolled debt, and forgiven amounts over $600 may be taxable income. What it does to your credit: substantial damage. New delinquencies, likely charge-offs and collections, and settled accounts reporting as settled for less than the full balance for seven years. Who it is for: people genuinely unable to repay who have weighed it against bankruptcy. Who it is not for: anyone who can service their debt, and anyone who thinks it is a credit strategy. It is the opposite of one.

Debt consolidation: one payment, same balance

What it does: a new loan or balance transfer pays off multiple debts so you have one payment, ideally at a lower rate. You still owe the full amount.

What it costs: interest, plus origination or transfer fees. What it does to your credit: a hard inquiry and a new account initially, then often an improvement as revolving utilization drops. The trap is running the cards back up while the consolidation loan is still outstanding, which leaves you with both. Who it is for: people with decent credit and a rate spread worth capturing, who have addressed the reason the balances accumulated.

Which problem do you actually have?

Pull your three reports free at AnnualCreditReport.com and read them before you buy anything. Then the question mostly answers itself.

• Items you do not recognize, wrong dates, wrong balances, duplicates: credit repair
• Everything is accurate but the monthly payments do not fit your income: credit counseling
• You cannot repay the balances at all on any schedule: debt settlement or bankruptcy, with real advice first
• Payments are manageable but the interest is punishing: consolidation
• Federal student loans are the pressure point: student loan repayment strategy, which is a different specialty again
• Both a wrong report and an unaffordable payment: two problems, sequenced, usually the payment first

The overlap nobody sequences well

Plenty of people have more than one of these problems at once, and the order matters. Correcting a report that is about to change again is wasted work, which is why resolving the underlying account usually comes first. The exception is a hard deadline, like a mortgage application with a closing date, where the sequencing may have to run the other way.

This is the honest reason we built two practices instead of one. Federal student loans are frequently both the largest balance on a household's books and the most misreported item on its credit file, and those are two different fixes that have to happen in the right order.

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