Debt settlement and debt consolidation are not the same thing. While they both help reduce your debt, they each affect your credit score and pocketbook differently. Before signing up with any debt management company, make sure you understand the pros and cons of their approach. And of course, be a smart shopper before signing any contract.

Debt Settlement - Instantly Eliminate Debt At A Cost

A debt settlement company gets your creditors to wipe out part of your debt immediately. Fearful that you may go into bankruptcy and that they won't see any money, creditors will reduce your debt. With smaller payments, you can more easily wipe out your principal.

But with debt settlement, your credit will be in poor shape for a couple of years. Debt settlement is treated like a foreclosure or bankruptcy by lenders. So it will be difficult to get decent credit, at least for two years. You will also have a tax liability with the eliminated amount.

Debt Consolidation - A Slow Approach To Debt Relief

Debt consolidation companies handle your creditors and payments. You send them one payment, from which they pay your accounts. They also negotiate lower rates with your creditors, helping you to get out of debt sooner.

With this approach, your creditors will temporarily freeze access to new credit. They will want to see in the next year that you are making regular payments and reducing your debt. Your credit score may also drop, depending if your lenders report that you are working with a debt consolidation company. But after a year, you will be able to apply for new credit, possibly with prime rates.

Research Before You Sign

Before you sign up any debt management company, make sure you research several companies before settling on one. Ask about their fees and process. Comparison shopping will give you a good idea on how reasonable the fees are. Details about the process will tell if the company is experienced in this type of debt management.

The sooner you reduce your debt, the faster you will improve your credit score and your finances. Debt management companies can help you get started.