Credit Card Debt Reduction: What Are My Options?

By: EconomyWatch   Date: 6 October 2010

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Lets face it, it is easy to get into credit card debt.

 

In many ways the system is designed to get you into debt. Credit card issuers make the most money from 'revolvers', people who pay some but not all of their debt, and keep rolling over their debts (leading to increasing amounts of interest income), but who do not default on the final debt.

If you look at your credit card statement, you will see that the Minimum Payment Due is probably highlighted.

What isn't highlighted, and in some cases what isn't displayed at all, is the interest payable on any debt balance that you don't pay.

Double figure interest rates are no laughing matter. If you keep rolling over your debt, then within months the interest that you owe could become more than the original debt.

The best advice with credit cards is and always will be pay off all the debt every month. Pay that off first. It is probably the highest interest rate of any of your credit options, and so is the debt that will build up the fastest.

Ok, but what if you have already built up a credit card debt, any may be facing the possibility of  bankruptcy. What are your options then?

Credit Card Reduction: The Options

Here are the main credit card debt relief strategies you can look at.

Credit Card Debt Settlement

This involves negotiating with the credit card companies for reducing the total amount of debt. An aggressive credit card settlement program can help to become debt free in a fraction of the stipulated period. However, this option should only be resorted to while facing bankruptcy or during unrecoverable debt scenarios, as it will lead to a downgrade of your credit score, and therefore make it harder to get credit in the future.

Credit Card Debt Consolidation

This involves merging different loans into a single card or line of credit, which has a fixed or a lower interest rate.

The principle is to pay off higher interest rate cards with a lower interest rate card, or better still a single line of credit, which normally carries lower interest rates and may have fixed repayment terms.

Then stick religiously to that repayment plan; repay your debts first when you get your paycheck, and only enjoy yourself with what is left after all your other fixed costs have been paid.

There are a few different financial products that may be able to support this kind of consolidation:

  • Home equity loan: A credit card holder can apply for a low interest home equity loan to pay of all the credit card outstanding in one go. However, this has a downside in that if a cardholder fails to meet the payments, his/her home may be repossessed.  

  • Low-interest personal loan: A cardholder can also acquire a low interest personal loan to pay credit card debts in lump sum and manage a single loan, without worrying about repossession. However, an individual needs to have reasonable creditworthiness to qualify for a personal loan.  

  • Card balance transfer: A cardholder can transfer debts into single low interest or 0% interest credit card. By making larger payments on this card s/he can ensure greater credit card relief and faster debt settlement.

Credit Counseling  and the Development of a Debt Management Program (DMP)

Managing credit card debts can be a perplexing task. However, there are a large number of credit counseling companies that can help with the process. A credit counseling service will help you review your debts and personal income and expenditure, and can then help you to structure a Debt Management Program.

They facilitate credit card relief by negotiating with the creditors, the bank that issued you the credit card or other personal financial facility, in order to reduce the interest rate and agree a fixed monthly payment.

The counselor will then work with you to ensure that you stick to the plan

The Bottom Line

Among all the suggestions stated above one should be able to find the right solution for themselves to get credit card debt relief .

If all else fails, you will end up in bankruptcy court.

In bankruptcy, you will pay off some or all of your debts under the supervision of the court. In some cases it might wipe out your debts all together.

Although this sounds great, bankruptcy could mean that you are never able to get credit in the future. It can also impact employment and business prospects or eliminate them entirely.

So it is highly advisable to look at settlement, consolidation or DMP options first, stick rigorously to a plan, and then make sure you don't incur credit card debts again in the future.


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