Because many debt settlement programs require that you stop sending payments to your lenders, they can have a negative effect on your credit score and other adverse consequences. But if you take the time to find a debt management plan with a proven track record of success, you will enjoy some of the advantages of settlement without the risk of harming your credit score.
Debt management is basically paying off all your unsecured debts in a single payment, usually a monthly one. The most common form of management program is a debt consolidation loan. This type of loan is typically secured against a second mortgage or home equity, so the lender can collect a monthly payment from you when you default on a debt.
When choosing a debt management program, consider both its benefits and its drawbacks. Consider how the plan will affect your credit score. If you’re trying to negotiate a lower interest rate or eliminate fees, then debt consolidation might be the best choice for you.
However, debt consolidation does not always improve your credit score. Sometimes, the fees you pay are just added to the accumulated debt, which means that you still have more to pay every month, while the monthly payment doesn’t reduce your debt at all.
On the other hand, a debt management program will often help you avoid bankruptcy, a much more serious financial situation that can cause you serious financial damage. Filing for bankruptcy does not solve the underlying problem, it only transfers all of the debt to another lender who will give you a lower interest rate on the debt. If you are unable to settle your debt with that lender, you’ll need to file for bankruptcy again to transfer the debt.
You also have to think about the effect that debt management programs will have on the quality of your life. There are many people who find relief from their debt after completing a program. But if the program is a sham, there’s no way to erase all of your debt, and you will end up having even more debt than before.
To begin improving your credit score, you should try to pay off all of your debt, with the exception of a few minimum amounts that you absolutely cannot afford to pay without compromising your health or your income. And do it on time. Your credit score is a measure of your responsibility, and ability to make payments on time, so if you’re paying off your debt without any late payments or missed payments, that’s a good sign.
If you’ve been trying to improve your credit but haven’t been making progress because you don’t have any extra income to pay your bills each month, you might want to consider hiring a debt management program. But always read the fine print on the contract carefully before signing on the dotted line. Make sure that the company has experience in negotiating and helping clients maintain an acceptable credit score before applying for debt management programs.
Debt consolidation loans aren’t always as good as debt settlement programs when it comes to increasing your credit score. The fees you pay to a debt consolidation company will be deducted from your income, so you won’t be able to spend any money that would be exempt from the loan repayment.
Debt management programs are typically for only a short period of time, and they will often require you to pay the fees once your debts are consolidated. Once your debts are paid, it is possible to re-apply for another debt management program, but you’ll have to pay for it each time you apply. Even if you are able to pay that fee, however, your credit score will likely suffer.
Some debt consolidation loans will offer lower interest rates than other debt consolidation loans. But you should never forget that you may have to pay these loans back, and some lenders will charge higher fees, depending on the interest rate of your debt.
Debt settlement programs can be a great resource for those who have to manage multiple debts or have high debt loads. If you have a lot of unsecured debt and no credit cards, they may be the best solution for you. They can also be an excellent choice if you have an excellent credit score and are in dire financial straits. But remember that these debt relief options will affect your credit score.