Debt often feels overwhelming when you’re dealing with multiple creditors at once. That’s why debt consolidation and debt management are helpful tools.
They both allow you to organize your debt into one simple, manageable monthly payment, but each approach works differently. Choosing the right one involves looking carefully at the debt you have, your credit situation, and other factors. Here’s what you need to know:
Debt Consolidation & Debt Management: What’s the Difference?
Debt consolidation and debt management are two different debt relief options that can make it easier to pay back what you owe. Here’s how they differ.
This approach lets you combine debts from multiple creditors into a single monthly payment. People often do this by transferring all their debts to a single credit card or loan, ideally with a reduced interest rate.
Another option is to develop a debt management program (DMP) with a credit counseling agency. You and the agency will agree on a feasible payment schedule, so you can still pay off your debt, but the agency will interface with creditors on your behalf. Valley Credit Union partners with BALANCE.
What Is Debt Settlement?
Both of those options are different than debt settlement. With both debt consolidation and debt management, you pay back the debt you owe, which helps preserve your credit score. Debt settlement, on the other hand, usually involves negotiating with creditors to settle your debt for less than what you owe, which will negatively affect your credit.
When to Consider Debt Consolidation
A debt consolidation loan or credit card balance transfer is often a great option for people who have relatively high credit scores and a lot of unsecured debt (i.e. debt that is not backed by an asset like a home or car). It’s also important to make sure that you’ll have the cash flow to cover each monthly payment.
Benefits of Debt Consolidation:
- If you have a high enough credit score, you might qualify for a low-interest loan or credit card, which can save you money.
- Most types of unsecured debt can be consolidated, including credit card debt, utility bills, medical bills, and student loans.
- Usually, you can still borrow money while you’re paying off consolidated debt.
Drawbacks of Debt Consolidation:
- Many people’s credit scores are too low to qualify for a low-interest credit card or loan.
- Not all debt can be consolidated. Mortgage loans and auto loans are typically not consolidated.
- People who aren’t fully committed to paying each month can end up accumulating more debt.
If you think debt consolidation might be a good fit for you, try our debt consolidation calculator to see what your monthly payments would look like.
When to Choose Debt Management
Debt management may be a better option if you have many debts that are becoming too difficult to deal with on your own.
Benefits of Debt Management:
- You can direct phone calls from debt collectors to the agency.
- You’re not applying for a loan or credit card, so a DMP is a good option for people with lower credit scores.
- Credit counseling agencies help people stay accountable and avoid adding to the existing debt.
Drawbacks of Debt Management:
- Creditors may suspend or close your current lines of credit, so you can no longer use them. (Creditors will sometimes reopen them if you successfully complete your DMP, though.)
- DMPs typically don’t include secured debt (like mortgages and car loans).
- All eligible unsecured debts must be covered in a DMP, even the ones you have no trouble paying.
If you have a lot of secured debt and/or you don’t think either of these approaches is right for you, you should know that there are other options available to you.
Valley Credit Union can help you take control of your debt
At Valley Credit Union, we work with our members in Oregon to help them overcome their debt. If you have questions about debt consolidation, debt management, or other options, we can help.
Are you ready to take the first step? Contact us today, and we’ll get started.