3 dangerous debt management myths

Managing debt can seem more complicated than quantum physics, but it doesn't have to be. Before you set a plan in motion to pay off your debt, let's take a look at some common debt management myths.

Myth No. 1: You need credit counseling

Credit counseling can help you create a budget and make payments on time. However, it's nothing that you can't do on your own. Instead of meeting with a credit counselor, simply use resources on the Internet to teach yourself. Bankrate.com offers a home budget calculator to help you get started.

Claims that credit counselors can cut your monthly payments dramatically are misleading. While a 50 percent decrease in payments can occur, it only happens in the rarest of circumstances. Most often, the debt is simply added back on to your payments at a later date.

Myth No. 2: Debt settlement saves you cash

Debt settlement sounds like a great debt management strategy on the surface. Unfortunately, it hardly ever works and it can ruin your credit.

In debt settlement, a company you hire tries to negotiate with your creditors to pay off your debts for much less. Usually you pay the company a lump sum followed by monthly amounts. During negotiations, the company withholds your money from the creditors in order to negotiate a lower price. The problem with this "strategy" is that you miss payments and rack up interest on the outstanding debts while the company holds your money, which hurts your credit. Some settlement companies will even take your money as a penalty if you miss a payment to them. Broadly speaking, paid debt settlement plans are a bad idea -- one that can cost you much more in the long run.

Myth No. 3: Debt management programs build credit

The notion that debt management plans can help your credit is misleading. While these programs are not necessarily bad for your credit, they could end up hurting it. Debt management programs often require you to make monthly payments to a company. That company then distributes your money to your creditors until your balances are at zero. However, if they make any late payments, which can occur, that hurts your credit report.

These companies also charge high fees, adding to your monthly expenses. Borrowers should avoid using these programs and instead create a plan on their own.

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