Wednesday, August 17, 2005

Debt Reduction Management Pros & Cons

If you find yourself in credit card debt, you've likely realized that digging yourself out is difficult. It's hard to keep track of all of the different cards you owe, when their payments are due and how you're going to find the money to make your minimum payments. As a result, your credit score is at serious risk. One potential solution to your credit dilemma is a debt reduction program.

Debt Reduction Basics

    As its name suggests, debt reduction management, also known as debt settlement or debt relief, aims to settle all of your credit card debt for less than you owe. Though you could try to negotiate your own settlement, an outside agency has years of experience and know-how, and its chances of success are greater than yours. Debt reduction is a controversial topic due to the nature of the practice and the methods used to obtain a settlement.

Debt Reduction Advantages

    The clear advantage of a debt settlement is that you're reducing the amount of money you owe to the creditors. You will also get rid of the debt cloud over your head. If you have a lot of debt and no means to pay it, the bank will benefit too, as even a small amount of the initial balance is better than nothing.

Debt Reduction Disadvantages

    Since you'll be saving for a settlement, the money you'd usually use to pay your minimum payments will now go toward the settlement funds, leaving your accounts past due. Collections calls and negative marks on your credit report will soon follow. Worse, the credit card companies have no legal obligation to settle with you, meaning that you could tarnish your credit report and get nothing in return. Lastly, a credit card company that refuses to settle has the right to sue you, which can lead to wage garnishment. Even if you do settle, your credit report will indicate that your balance was not paid in full; this is one of the worst blemishes you could have on your credit file.

Alternatives to Debt Reduction

    If you decide that debt settlement isn't for you, there are some options. A more acceptable form of debt relief is to enter a debt management program, which allows you to receive reduced interest rates and a payment schedule that will have you debt-free within five years. However, doing this requires you to close all of your credit accounts. You can also apply for a consolidation loan which would then be used to pay off your cards, but this leaves you prone to the possibility of racking up your cards again while still paying off the consolidation loan. A final option is to contact each of your creditors directly and attempt to work out a payment plan that allows you to get caught up. While this option does not require outside help, it is time-consuming and comes with no guarantee of success.

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