If you are feeling overwhelmed by your accumulated debt and looking for a way out, you may have come across a few different strategies, including debt consolidation, debt management and debt settlement. While any amount of relief may seem beneficial, carefully evaluate each method to ensure you preserve your credit score as much as possible. Each of these options has a very different effect on your credit. Be especially scrutinous when dealing with any company that claims to eliminate your debt, as its tactics may cause serious harm to your credit report for many years, or at the very least, the company could charge hefty fees. The last thing you need when attempting to climb out of debt is another bill.

Debt Consolidation

One of the first-line options for debt control is debt consolidation. This involves combining debts into one loan in an attempt to lower monthly payments and interest charges. Many lenders offer specialized debt consolidation loans that come with relatively low interest rates and can stretch terms over several years, reducing your monthly obligation. Another debt consolidation option is offered by many credit card issuers. The credit card company allows you to transfer existing balances on other cards or loans to the new card, often with a low or even zero interest introductory period. If you choose this option, pay close attention to the amount of time allotted for the special rate and make your payments on time, as one late payment can sometimes void the special terms.

Debt Management

Debt management is simply creating a plan to repay debt in a meaningful way. There are several debt management companies you can hire to create a strategy for you, but expect to pay fees to the company for designing a plan you could most likely create yourself. The most important step in managing your debt effectively is to get organized. Stay on top of due dates and minimum payments. Next, research debt management techniques, many of which are available online and free of charge. For example, Dave Ramsey has a very popular series on debt management that has worked for many people.

Debt Settlement

Debt settlement can eliminate all or a portion of your outstanding debt but comes with a price, so it should be a last resort. Filing for bankruptcy is one way people choose to settle their debts and start over with a clean slate. However, the slate is not left very clean, as a bankruptcy is a huge black mark on your credit report that remains for many years. A slightly less burdensome option is negotiating a debt settlement arrangement with your lender in which you offer to pay less than what is owed. A debt settlement arrangement still causes a big drop in your credit score and, depending on how the lender reports the debt settlement to the credit reporting agency, could raise a red flag to lenders in the future.

  1. What's the difference between debt consolidation and debt settlement?

    Learn the differences between negotiating a debt settlement with your existing creditors and applying for a new consolidation ... Read Answer >>
  2. Will my credit score suffer from debt consolidation or refinancing?

    Learn how different debt relief options – consolidation, settlement, credit counseling and bankruptcy – could affect your ... Read Answer >>
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