Debt settlement, debt consolidation and debt management plans are the most popular debt reduction strategies. When used properly, each one can help you save money, boost your credit score and reduce your debt. While they all have similar goals of improving your financial standing, their approaches vary significantly.

Debt settlement, often considered the best option, cuts down the amount of debt you actually owe. Debt consolidation simplifies your monthly payments and can save money on interest. And a debt management plan similarly simplifies payments and helps you meet your goals.

Each option is useful in certain situations. If you’re unsure of which one is right for you, speak with a debt adviser to review your options.

Debt Settlement

Debt settlement, sometimes called debt resolution, is a process of negotiating existing debts with creditors for the end purpose of reducing the principal debt amount.

The best way to go about debt settlement is to enlist the help of a well-established debt settlement firm. A dedicated firm will bring years of successful experiences to the situation and may already have a positive relationship with your creditor.

The first step is to set up an appointment with a credit counselor at the debt settlement firm of your choice. You and your counselor will review your finances together. He or she will assess the type of debt you have – typically credit card debt or another form of unsecured debt – as well as your total debt amount.

Based on your finances, your counselor will outline a settlement plan for your approval. Once you agree to the plan, your counselor will direct you to save up a certain amount of money each month for several months. Once you reach a target amount of savings, your counselor will use this money as a bargaining tool.

The counselor will contact one of your creditors and offer a portion of your savings to pay off the debt. If your lender accepts the offer, it will receive an immediate lump sum payment, paid out from your designated account. In return, you’ll pay off your debt in full for only a fraction of the total amount you owe.

Debt Consolidation

Unlike debt settlement,  debt consolidation does not change the principal amount you owe and does not require the approval of your creditors. The most common way to consolidate your debts is to take out a new personal loan. Make sure this loan is the size of all your other loans combined. Then, use the money from your new loan to repay all your other loans in full.

Once this process is complete, you’ll be left with a single, larger loan to repay rather than many smaller ones, and you will no longer owe your original lenders. It offers a simper repayment schedule, as you’ll only need to pay one bill each month.

Additionally, your new loan will probably come with a lower interest rate, saving you money over the duration of repayment. You may be eligible for an even lower interest rate if you use collateral such as your home or car. However, this adds an element of risk to the loan — if for any reason you fall behind on payments, you risk losing whatever property the loan is tied to.

You may also have the opportunity to personalize your repayment terms and make them fit your financial situation. Your new lender can work with you to stretch out the amount of time you have to repay the loan, thereby lowering your monthly payments. Conversely, if you have the means to do so, you might instead choose to condense the repayment schedule and get out of debt sooner.

Debt Management Plans

A debt management plan (DMP) is closely related to debt consolidation. It reduces the amount of bills you’re responsible for paying each month, and it can save you money over time. However, unlike with debt consolidation, a DMP does not involve taking out a new loan or immediately paying down your existing ones.

When you enter into a DMP with a credit counseling agency, you’ll send the agency a single monthly payment for several of your debts. The counseling agency will then disburse the payment to all of your creditors appropriately. This type of plan is meant to serve as an aid and help keep you on track with all your debt payments.

In return for taking part in a DMP, your creditors will often agree to reduce your interest rates or waive certain fees. However, if you make a late payment or miss a payment altogether, the terms of your plan may be canceled and you risk losing these privileges.

Choosing the Best Option

Meet with a credit counselor to discuss each of these options and how they would work in your specific situation. Keep in mind, however, that no option will get rid of your debt on its own. No matter which route you take, becoming debt-free will require your commitment and responsibility. With your debt counselor, choose the path that will be most helpful as you pay off your debts and solidify healthy financial habits.