Comparison of Debt Reduction Options

Many people feel like they are drowning in their debt, and while there's no magic spell to eliminate debt, with some research, legwork and commitment, you have the ability to dig yourself out. It's vital to understand your options so that you don't waste time and energy going down paths that are inappropriate for your financial situation.

Debt Consolidation

You may be able to reduce your debt more quickly by using a debt consolidation loan. These loans are particularly useful for those who have trouble keeping track of multiple payment due dates. Oftentimes, consolidation loans are advertised as having extremely low interest rates to lure consumers into thinking they will pay less overall by consolidating; however, this isn't always the case. Before making any commitments, it's vital to calculate whether you're really saving money by consolidating. Since consolidation loans eliminate your current balances, you may be inclined to spend even more in the future.

Credit Counseling

Not only will a credit counselor help you to work through your debt, but a reputable company should also assist in figuring out how you got there in the first place. Unlike debt negotiation or debt elimination companies, which are often scams, credit counselors treat the whole problem and not just the symptoms so that you end up with a healthier financial picture. Credit counselors may recommend a debt management plan if you're behind on payments or having a difficult time meeting your minimum payments each month. Such a plan will involve the credit counselor negotiating lower interest rates or payoff balances.

Bankruptcy

Bankruptcy is a last resort for those with extreme debt issues. Under bankruptcy rules, those who qualify receive a court ruling that says they do not have to repay certain debts; however, the effects of bankruptcy may be devastating. You may have difficulty obtaining new credit, a mortgage, life insurance and possibly even a new job. Bankruptcy stays on your credit report for up to 10 years.

Warnings

All three of these options may make it difficult to obtain new credit down the road. Lenders view both debt consolidation and debt management plans negatively because they demonstrate your struggle to make payments in the past. However, if you are truly committed to paying off your debts and keeping them paid off, your credit score will rise and you will find yourself with more lending options.