Protect Your Credit: The Benefits of Debt Management Over Settlement

When looking at debt management, settlement is also often a consideration. Many people think that they should just settle the debt and put it behind them. However, in the interest of your credit rating, this may not always be the best solution. Here are a few benefits of going with debt management over debt settlement in regards to your credit.

Make Steady Payments

When you decide to start a debt management plan, you agree to make monthly payments to all of your creditors. They may agree to lower the interest rate that you pay them in return for receiving regular payments from you. By comparison, with debt settlement, you give your creditors a lump sum of money, and they cancel the remaining portion of the debt. 

When calculating your credit score, one of the main things that credit bureaus look at is the steadiness of your payments. This one factor makes up about 35 percent of your overall credit score. Therefore, if you get on a regular payment schedule again, you can boost your score. When you make just one payment and get rid of the debt, this is not going to give you that long-term help that you get from a debt management plan. 

Pay the Balance

When you decide to choose a debt settlement, you are not going to be paying the entire balance that you owe. Many times, creditors will often settle for less than half of what you owe. They cancel the rest of the debt, and this costs them a lot of money. From their perspective, you did not live up to the agreement that you signed when you got the account. Therefore, they will be likely to report this negatively to the credit bureaus. 

A debt management plan works a little bit differently. In most cases, you will still pay the entire balance that you owe on the accounts. The creditors may lower your interest rate significantly or give you flexible repayment terms. However, they are not actually canceling any debt. Therefore, they are not losing a great amount of money. 

This type of plan will hurt your credit a bit because you did not fully live up to the agreement. When they have to change the interest rate to help you out, you are costing them money that they could have made under normal circumstances. Although the creditors will still lower your credit rating, they look at debt management more favorably than at debt settlement. Therefore, they will not lower your credit rating nearly as much as they will if you go through debt settlement. 

Future Considerations

While a debt settlement might seem appealing at the time, it is not going to be in your best interests long-term. You get rid of the debt immediately, but it can be very hard to borrow any money in the future. Making any large purchases on credit will become much more difficult from that point forward. 

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