Feeling like you have too much debt to deal with? Expenses like credit card debt, student loans, or medical bills can leave you feeling worried about your financial future. If you are looking for ways to get rid of your debt, you may have come across debt management vs. Debt settlement options. But, which option is better?
Here you will learn all the details you need to know about managing debt and settling debt. You may also find that there are other great financing options available for you to choose from!
What Is the Difference Between Debt Management and Debt Settlement?
Debt management and debt settlement are both ways borrowers can eradicate their existing debt. They differ in factors like:
- Amount of time required.
- Effect on the borrower’s credit score.
Borrowers who opt for a debt settlement program must first decide on a company to work with. After they pick a company, the company will provide all the debt negotiations and communicate with the borrower about their settlement options. Borrowers are then responsible for making the debt settlement payments along with any other fees required by the debt settlement company.
Debt management is when borrowers pay off their debts without assistance from a settlement provider. While there are many credible debt management services, it is still important for borrowers to research their options before committing to any one loan or financial product. Borrowers can manage their debt by:
- Paying off their existing debts.
- Getting a debt consolidation loan.
- Taking financial steps to afford their debt payments better.
When it comes to the health of your credit score, you may be better off going with debt management over debt settlement. If you successfully manage your debt, you may not have to worry about a dramatic decline in your credit score. On the other hand, debt settlement almost certainly will negatively impact your credit score.
What Are the Pros and Cons of Working With Debt Settlement Companies?
Consider the pros and cons of working with a debt settlement company. Some positive aspects involve the ability to completely eliminate debts and getting a fresh financial start. During the debt settlement process, the company will work with creditors on the borrower’s behalf and negotiate a settlement amount. After the settlement amount is paid, you can enjoy a fresh start financially, free of debt. They can work on making smart financial decisions that will help you maintain or improve your credit.
There are also some negative aspects that can come from working with a debt settlement company. To begin, most debt settlement companies charge fees for their services. This can be a major inconvenience for people already in the middle of financial hardship. Furthermore, debt settlement efforts are not guaranteed to be successful. For example, not all creditors accept settlement offers. It is also common for debt settlement companies to overpromise and underdeliver, meaning they may not be able to give you everything they say they can.
Debt settlement might also lead to a decrease in your credit score. Unfortunately, debt settlement has the potential to affect your credit score negatively anywhere from six months to two years! So, before you commit to debt settlement, make sure there are no other available financial options.
What Are the Pros and Cons of Debt Management?
If you decide not to choose debt settlement, you can rely on debt management. Like settling debt, managing debt will also result in the borrower getting rid of their existing debts. However, there is a good chance that debt management will take more time. But, that extra time may be worth it to save your credit score.
Tips for Coming up With a Debt Management Program
You don’t always need official debt management programs in order to get your finances under control. Instead, try making your own debt management plans. Below are some tips you can utilize to create your own debt management plan and save money.
- Have a garage sale and sell unwanted items.
- Get a part-time job temporarily.
- Eat at home instead of ordering takeout frequently.
- Go through subscriptions you no longer use and cancel them.
- Talk to your various providers and see if they can lower payments or interest rates for you.
- Create a budget and use any extra money leftover to make debt payments.
- Try the snowball or avalanche debt methods.
What Is the Difference Between Debt Settlement vs. Debt Consolidation?
What is the difference between debt settlement and debt consolidation? Essentially, debt consolidation is just a form of debt management. However, debt consolidation can be one of the quicker ways you can go about managing debt.
With debt consolidation, you can apply for a single loan that will cover the existing balances of your other debt. If approved, you can use the consolidation funds to pay off your existing debt. From there, you can pay off your existing debt with one monthly payment instead of several. Depending on circumstances like the total debt amount, interest rate, and payback terms, you may find that a debt consolidation loan is more efficient than paying off each debt individually.
As discussed, debt settlement programs may cause a significant decrease in your overall credit score. Comparatively, debt consolidation can actually improve a bad credit score over time!
How To Consolidate Debt
The most efficient way to consolidate debt is through a debt consolidation loan. There are debt consolidation loans available for people with either high or low credit, and they come in several different forms.
Below are some of the most popular types of debt consolidation loans.
Personal Installment Loans From a Private Direct Lender
Perhaps the most convenient type of debt consolidation loan are installment loans from a direct lender. Consolidating debt with a personal loan like an installment loan can come with benefits like:
- Lower monthly payment.
- Personalized payback schedule.
- Long-term or short-term loan options.
- Potentially lower interest rates.
Individuals with a higher credit score may consider getting a loan from a bank. Banks are strict and traditional lenders, which means they rarely accept borrowers who don’t have a good credit score and a clean financial record. Suppose you have a less than perfect score or have suffered from financial hardships in the past. In that case, you are probably better off applying for a debt consolidation loan with a private direct lender or credit union. If you are confident about your current credit score and financial standing, you may be approved for a loan with convenient monthly payments and optimal interest rates.
Loans From a Credit Union
If you meet the strict eligibility criteria, you may qualify for a debt consolidation loan from a credit union. Credit unions often require borrowers to have a credit score within a certain range, live within a specific area, or meet other specific financial requirements. However, since a niche group of borrowers owns credit unions, they often offer unique perks and benefits that banks and private lenders do not.
Unsecured or Secured Loans
If you are worried about your credit score holding you back from finding a loan, you may be considering secured vs. unsecured debt options. Secured debt is funding that requires the borrower to offer up collateral. Some common types of secured loans are mortgages or car title loans. While a mortgage is used solely for purchasing property, you can use funding from a car title loan for virtually anything. However, keep in mind that your lender will have the legal right to repossess whatever property you offer as collateral if you go with a secured loan and default.
Debt Relief vs. Bankruptcy
Other options you may consider are debt relief or bankruptcy. Debt relief essentially covers all forms of debt settlement, debt management, and debt consolidation. There are also official debt relief programs sponsored by the federal government that people in need can take advantage of. If you want to sign up for a debt relief program, you can visit the Federal Trade Commission website.
Bankruptcy, on the other hand, is much different. To declare bankruptcy means formally acknowledging to all creditors and financial institutions that you are without sufficient funds to cover your debts. For the sake of your credit score, it may be best to declare bankruptcy before your unpaid debts go to debt collectors.
During the bankruptcy process, you may get in contact with a nonprofit credit counseling agency. There you will find certified credit counselors who can give you advice on overcoming your Bankruptcy and getting your financial situation on track. While bankruptcy will also have a negative impact on your credit score, it may be possible to remove bankruptcy from your credit report after some time.
How Do Credit Scores Work?
Since debt management, debt settlement, and debt consolidation can have such a significant impact on your credit score and credit report, it’s essential to understand how these things work. Before they lend money, lenders will take a look at a borrower’s credit score and credit report to make sure they are a suitable lending risk. To make sure your credit is in tip-top shape, pay attention to your finances regarding the following categories:
- Payment history — It is important not to have late or missing payments on your file. Creditors like to see on-time payments in the credit history of their borrowers.
- Credit utilization ratio — How much money you regularly bring in compared to how much total debt you owe.
- Credit history length — How long you have had open and active financial accounts, like credit cards, bank accounts, or savings accounts.
- The number of hard credit checks — Every time you apply for a loan, credit card, or other financial product, lenders will perform a hard credit check. Too many hard checks within a short period of time is usually a red flag for lenders.
- Credit mix — The different kinds of financial accounts borrowers have is also important to credit bureaus collecting data for credit reports.
You can also find other helpful advice for managing your finances on the CreditNinja free financial resource blog!