Debt Settlement Vs. Credit

When you've fallen behind on debt and face endless calls by collections agencies and creditors, it can be hard to try to get a handle on your financial problems. Even the terms involved can be confusing. When dealing with financial issues, you need to be clear of the different between credit and debt, as well as understand what debt settlement is and the impact it has.

Credit and Debt

Whenever you borrow money from someone, you're using credit. Credit comes in many forms, from traditional loans for buying a home or a car, to lines of credit and credit cards. You even use credit when you, for example, go to the doctor's office and incur medical expenses that you pay back at a later time. Your ability to obtain credit is largely based on your history with using it in the past, which creditors use to determine whether to give you a new loan or form of credit.

Paying Debts

As long as you pay your debts on time and don't run into financial difficulties, such as losing a job, you are unlikely to ever have to use any kind of debt settlement. When you fail to pay back your debts, however, you face negative consequences. For example, your ability to get new credit is damaged, as creditors will be less likely to give you a new loan if they see you haven't been able to pay back your old loans.

Debt Settlement

In some situations, people fall so far behind on their debt payments or experience financial hardships to the extent that there is almost no way they will ever be able to pay back their debts. Sometimes, such debtors and their creditors agree to settle some or all of the debt. Debt settlement is simply an agreement between a creditor and a debtor in which the creditor agrees to accept new repayment terms. The debtor, in turn, agrees to pay back the creditor for less than the amount the debtor originally owed.

Impact

Settling your debts affects your finances in two key ways: by making it harder to get new loans and by reducing the amount of money you owe. Debt settlement allows consumers to pay back debts for less money, costing the consumer less and making more money available for other needs. On the other hand, when you and your creditor agree to settle a debt, you are effectively failing to repay all the money you owe. Other creditors will then be less likely to lend you money because you failed to meet your previous obligations.