With the average U.S. household owing more than $10,000 in credit card debt, it’s no surprise that millions of consumers are turning to debt management companies or debt settlement firms to become debt free.

However,  there are enormous differences between these two types of organizations. A good debt management company offers free or low cost services, can help you preserve your credit rating, and will teach you to organize your finances and budget properly. It will also successfully negotiate with your creditors to give you financial relief.

By contrast, even with the “best” debt management companies, consumers pay high fees, wind up with serious blemishes on their credit files, and receive little to no financial education.

Additionally, while many debt management firms “guarantee” their work, in reality they have no way to ensure that their questionable techniques and unorthodox negotiating methods will be effective.

Read on to discover the downside to using the services of debt settlement companies – and why using a debt management company is far more advantageous.

The Hit to Your Credit Scores

The primary problem with debt settlement companies is that they typically advise you to stop paying your bills for a few months – sometimes for six months or more. At the end of that period, the debt settlement company goes to your creditors and tries to negotiate settlements on your behalf.

The logic used by debt settlement firms is simple: They figure that after a few months of not getting paid, your creditors will be so eager to receive some money (instead of no money) that these creditors will gladly settle your debts for pennies on the dollar.

If only it were that easy.

The problem with this is strategy is two-fold. First, you wind up with serious black marks on your credit reports and you decimate your FICO credit scores. After all, just one late payment can drop your FICO credit score by 50 points or more. Imagine the damage done by being three to six months late on multiple accounts.