I see a lot of people talking about different debt management options as a way to dig themselves out of a financial hole. Many of the people I encounter exploring debt management think of it as a silver bullet to their troubles and few understand the impacts and ramifications. I wanted to explore the different options so you all have a realistic view of what these programs will and won’t do, and which may be right for you if you do want to go this route.
The important thing to note, debt management is not the cure for financial woes. If you have poor financial habits, addressing your debt in the short term is simply a bandaid. You may very well find yourself in the exact same situation again if you allow yourself to rack up debt by not following a budget and financial plan. With that disclaimer aside, let’s explore the different options. There are three main categories: debt management, debt consolidation, and debt negotiation.
Debt management involves working with a third party to understand your debt obligations and build a plan to address your debt. This means setting up payment plans and timelines to get your debts paid down. Some companies will offer to pay the creditors on your behalf which lets you make one payment to them, making it easier for you to manage. The major downside with debt management is that you often pay a fee since most companies don’t offer services for free.
Debt negotiation has some similarities to debt management in that a third party will offer to handle your debt for you. However in debt negotiation they will try and negotiate with the credit institutions to settle for a portion of your debt. This is nice in the fact that you often end up paying less in the principal (amount borrowed) plus interest since you won’t own the debt longer. Similar to debt management, the companies will charge a fee for this service, normally a percentage of your debt held. One major disadvantage most people don’t know is that your credit will take a hit. Most debt negotiation programs require you to stop paying your debts to become delinquent. This gives the company leverage to negotiate your balance.
The third option is debt consolidation. This involves aggregating your debt into one account at a lower interest rate. Many companies will offer balance transfer cards where you can transfer your debts to a single card and make payments like you normally would. These options typically include a transfer or origination fee which is a portion of your debt balance. When exploring debt consolidation you want to look at your payment timeline. If you are able to focus money toward paying down debt, you are often better off just paying your current debts. If you have to stretch out payments long term then it may be worth paying the fee and getting a lower interest rate which will be cheaper in the long run.
At the end of the day the best option is a strong financial plan and diligence in your spending habits. My course covers building financial habits and goals which are cornerstones to financial well-being. My arming yourself with knowledge and discipline you can stay out of sticky financial situations, or it can help you climb out of the hole if you find yourself in one. I hope this has been helpful and I wish you the best of luck on your financial endeavors.