Debt Management vs. Debt Settlement: How Each Affects Credit

Hint: They are not the same thing

Updated May 13, 2024
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If seeing your credit card statement makes you cringe every time, you’re probably one of the 38% of households wrestling with credit card debt. You’re likely also the same person who should look into the various options for how to pay off debt. Some options may seem attractive but could end up hurting you in the long run.

Keep reading to learn the differences between two popular ways to get out of debt: debt management and debt settlement and why it’s so important to know how each method operates and how they can help you get out of debt.

Main Differences Between Debt Settlement and Debt Management

When you first hear about debt management and debt settlement, you might think they are interchangeable things. That’s definitely not the case. They might have the same end goal, but the process of reaching that goal is quite different, and the lasting effects on your credit can be drastically different. A few differences:

1. Length of repayment

Debt management is a long-term process to get rid of your debt. Repayment periods usually take several years but you’ll be nearly or entirely debt free at the end.

Debt settlement is a short-term process that allows you to pay off all your debt with one lump sum.

2. Effects on credit

Whether you currently have a good or bad credit score, debt management and debt settlement can both help your credit score in the long run.

Managing your credit over a long period of time will improve your score over time. However, settling your debt can have a huge negative impact on your score initially but give you the ability to start practicing better financial habits debt-free so your score can inch back into a good range.

3. Eligibility

If you have a moderate to high amount of debt, you’ll likely be eligible for a debt management program even if you’ve been making on-time minimum payments.

To become eligible for debt settlement, you usually need to be a few months before creditors will even consider negotiating a settlement.

4. Amount repaid

With debt management, you will pay off all the debt you owe and possibly a little less interest.

When you settle your debt, you’ll pay less than the total amount you owe after negotiating a deal with your creditor, but you’ll also pay taxes on the portion that is forgiven.

In a nutshell...

Basically, debt management is a program set by your creditor to help you pay off your debt long-term. With specific guidelines in place, they are holding you accountable to the program because you risk losing any lower rates they have offered to help you out. If you’re not great with self-accountability, this might be a good method for you to manage paying your debts.

With debt settlement, you’re avoiding the worst financial possibility. Settling your debt is usually the last resort before someone files for bankruptcy.

Debt Management Overview

Now that you know the basics of debt management, let’s look a little deeper at this method of debt repayment. Debt management programs are similar to debt consolidation in that you’ll have one monthly payment, but different because of the additional consequences if you make a late payment or miss one entirely.


  • Improved score. You’ll likely see your credit score improve once you enroll in a debt management program and begin making monthly payments.
  • Accountability. With consequences for not fulfilling your end of the debt management program, there is true accountability for getting payments in on-time. You just scored a sweet deal that’s meant to help you pay that debt off so you’ll be more motivated to not mess it up.
  • One monthly payment. Similar to debt consolidation, you’ll have a single payment each month. Unlike debt consolidation, it won’t go toward another loan you have borrowed. You’ll make the payment to your debt manager who will make payments on your debts on your behalf. This saves you the hassle of managing multiple payment due dates and amounts.


  • Strict structure. When you can make your monthly payments, a strict structure won’t be a con. It can be a con if you take on payments you can’t afford. The strict nature of debt management programs has no room for missed or late payments.
  • Too much debt. Most debt management programs last around 5 years. If your debt has accumulated so much that you can’t pay it off in that time frame, then even the best program could be a waste of time when another option may suit you better.
  • Additional fees. Part of your monthly payment may be going to the agency that is managing your debt for you. Sure, they helped you to get out of some fees with your creditors, but unless it’s a nonprofit agency, their fees may be just as high or higher than what you were paying before. Think of it as a money handling fee. You’re paying them to make sure your payments are made on time.

People consider debt management when…

  • They have a low credit score that doesn’t allow them to borrow a personal loan or open a new credit card to do a balance transfer
  • The majority of debt is wrapped up in credit cards
  • They need outside accountability to keep spending and repayment habits in check

Does debt management hurt credit?

Debt management may hurt your credit initially. You might have some trouble if you’re applying for any sort of loan or credit card while you’re enrolled in the program. However, if you stay on track with your monthly payments, your credit score may bounce back and continue to rise as you approach being completely debt-free. Ultimately, debt management could save your credit in the long-term. You can check your score for free with Credit Sesame.

Debt Settlement Overview

Debt settlement can be a blessing and a curse. The blessing is that it can instantly relieve you of your looming debts, but the curse is not all creditors are willing to settle for an amount lower than what you owe. It’s a game to get yourself into a position that allows you to even start conversations of settling, and that game doesn’t always pay off to your benefit. If you opt for debt settlement, you’ll likely hire a debt settlement company rather than tackle the task yourself.


  • Pay less. If you’re one of the lucky ones, you can usually negotiate a settlement that is quite a bit lower than what you currently owe. You will have to pay that amount in one lump sum, but then you’re done!
  • Lower credit score. Even though your credit will take a hit even if it’s low, it won’t take nearly the hit if you were to file for bankruptcy.
  • Keep your stuff. When you file for bankruptcy, you risk having your assets liquidated. When you settle your debts, you can avoid that and keep your belongings.


  • Already delinquent. The game you play to get creditors to have a settlement conversation with you involves going delinquent on your accounts. If you’re seen struggling with payments, they’re more likely to negotiate with you for a lesser amount.
  • Not guaranteed. Here is why the game is dangerous. Some creditors won’t ever offer you a settlement deal regardless of how many months you’re delinquent on your account, and they are not obligated to.
  • Worse off than the start. If you fail at the game, you’ll be in an even worse position when it comes to paying off your debt. Your credit score is likely to have already started dropping, and you’ll have to pay any fees you incurred on top of your overwhelming debt.

People consider debt settlement when…

  • They are afraid filing for bankruptcy might be the only option
  • Accounts have already gone to collections
  • They don’t see any other way out from under their mountain of debt

Does debt settlement hurt credit?

Similar to debt management, you will likely experience a negative impact on your credit score initially. The impact will be greater because you will be paying back less than the full amount of what you owe, and it will be noted on your credit report for future creditors to see. It’s not something that’s unreasonable to eventually bounce back from with good financial habits.

How long does it take to improve your credit score after debt settlement?

With proper financial management on your part, you can start to see your score improve in a matter of months. This means you are spending wisely and not racking up debt again after your settlement. If you dig the same hole as before, creditors will not be as willing to help you climb back out as they were the first time. After settling, your goal should be to live within your means and not miss any payment deadlines.

How long does debt settlement stay on your credit report?

Your credit report will include your debt settlement for seven years. As the more time goes by, creditors will cite your settlement less often as a reason to not offer you loans or credit cards. By maintaining a positive credit history since your settlement, you can work your way into a good credit standing much quicker.

Should you consider bankruptcy?

If you don’t qualify for debt management or debt settlement, then bankruptcy might be your last resort option. Keep in mind that declaring bankruptcy will only relieve unsecured debts such as credit cards and personal loans.

Before making a decision, gather all the information you have on your debts and speak with a financial advisor to get your finances professionally analyzed before you start the process. In the end, bankruptcy can be an effective way to learn a hard lesson on financial literacy and keep you from falling back into debt in the future.

National Debt Relief Benefits

  • No upfront fees1
  • One-on-one evaluation with a debt counseling expert
  • For people with $30,000 in unsecured debts and up

Author Details

Lauren Stewart

Lauren Stewart is a freelance writer and personal coach. Get to know her!