Protect Your Credit: The Benefits of Debt Management Over Settlement

If you are considering debt management, settlement is most likely an option as well. When you have debt, you need to consider all of the possible means to eliminating it. While debt settlement is an option, it can hurt your credit worse than debt management. Here are the basics of why you should consider debt management instead of debt settlement.

Paying Off the Debt

One of the big reasons that debt management is better for your credit is that you are still paying off all of your debt. For most debt management programs, you will negotiate a lower interest rate on your existing debt, but you will still pay off the whole balance. 

With debt settlement, you negotiate a cash settlement on your debt. This means that you pay one lump sum, and the creditor takes less money than what you owe. For example, you owe $5000 on a credit card, and you have not paid it in months. The credit card company negotiates a cancellation of debt and allows you to pay $3000 to close out your account. Therefore, you just made $2000 in that transaction.

This may sound very appealing; however, it is not good for your credit score. The creditor would much rather have someone pay off all of his or her debt at a lower interest rate than cancel part of the debt. In the first example, with a debt management program, you would still be paying off the $5000 credit card with interest. You would just be paying 2 percent interest instead of 20 percent interest, for example. This arrangement is much more favorable for the creditor and will reflect more positively on your credit report. 

Regular Payments

Debt management can also be better for you than debt settlement because the former requires making regular payments. Many people stop making their payments when they get deeply into debt. Many of them then choose between debt management and debt settlement programs. With a debt settlement program, you make one lump sum payment, and then the account is clear. This does not help your credit in any way. 

A debt management program gets you on a regular payment plan. Every single month, for perhaps the next several years, you are committed to making your monthly payments on time. You send your money to the debt management plan providers, and they send it out to your creditors on time every month. Therefore, you make your payments to every creditor without being late for a long period of time.

One of the most important criteria for determining a credit score is whether you make your monthly payments on time. If you make your payments on time every month, your credit score will rise. If you were not making your monthly payments before joining the plan, this will actually help your credit score by comparison. Most debt management programs will last at least five years if you have several thousand dollars of debt. Therefore, this is a long-term solution that the credit bureaus prefer. 


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