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 climb 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.
What is debt consolidation?
Debt consolidation involves combining multiple debts into one, usually by taking out a debt consolidation loan from a bank or other lender. The interest rate on a personal loan will typically be much lower than the APR on a credit card, and you'll have much longer to pay it off.
Some lenders will pay your creditors directly, leaving you with just one fixed monthly payment to take care of.
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
Some people will use a balance transfer card to move a balance from a high-APR card and avoid paying interest during the new card's intro period. The Wells Fargo Reflect® Card gives you a 0% intro APR on purchases and qualifying balance transfers for 21 months from account opening (17.74%, 24.24%, or 28.49% variable APR thereafter).
There are balance transfer fees and you'll need 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. 17.74%, 24.24%, or 28.49% 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%
What is debt relief?
Debt relief, also known as debt settlement, is the process of negotiating with creditors to have some of your balances forgiven. Typically, people sign up with a debt relief company that negotiates on their behalf.
Debt relief companies can charge as much as 25% of your enrolled debt for their service, and success isn't guaranteed. There's also damage to your credit score that can take a long time to repair.
For clients who successfully complete a debt settlement program, however, it's worth the trade-off to be back in the black faster.
Is debt consolidation or debt relief right for you?
here's what to consider when comparing the two options:
- Fees: Debt consolidation loans may come with origination fees of up to 8%, and balance transfer cards typically charge a balance transfer fee of 3% to 5%. If you're working with a debt settlement company, your settlement fee will be between 15% and 25% of the total debt you enroll.
- Debt relief can hurt your credit score. While negotiations are ongoing, all your missed payments will appear on your credit reports. Payment history is the most critical factor in your credit score, so multiple late payments could tank your credit for a time.
- Debt consolidation requires better credit: If your credit has already taken a hit from 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 owe enough 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.
If you have good credit and the financial discipline to make timely payments, debt consolidation could be a better strategy. If you are at least $7,500 in debt and facing financial hardship, debt relief might be the better option.
Offers in this section are from affiliate partners and selected based on a combination of engagement, product relevance, compensation, and consistent availability.
Freedom Debt Relief has resolved over $20 billion in outstanding debts since 2002. It offers free credit card debt relief consultations.
FAQs
Is debt relief legit?
While there are scammers, debt relief is a legitimate practice. The companies on our best list have all been in business since at least 2009 and are all accredited by the Association for Consumer Debt Relief.
Does debt relief hurt your credit?
Because debt relief companies ask clients to stop making payments on their bills, your credit will be damaged for a while. But as you settle your accounts, your score will slowly improve.
Can I get a debt consolidation loan with bad credit?
Getting a debt consolidation loan will be harder if you have a credit score below 600, but there are online lenders and credit unions that approve borrowers with scores of 580 or below. You may also be able to secure financing if you provide collateral or a co-signer.
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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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