If you've made a budget but can't stick to it or if you find that your expendable income doesn't begin to cover your debt, you may consider looking into programs for reducing credit card debt. Reputable agencies can assist you in determining which debt reduction option is appropriate for your financial situation. However, the Federal Trade Commission warns that certain programs and services have inherent risks attached--and some programs might cause you to pay more in the end than you would had you handled debt yourself.
What Are Options?
When credit card debt becomes overwhelming, often the consumer's knee-jerk reaction is to capitulate to a company that offers a specific service, such as debt consolidation, debt negotiation or bankruptcy. However, the Federal Trade Commission urges consumers to first see if they can take financial matters into their own hands by developing a monthly budget. First, list all sources and amounts of monthly income. Then itemize your necessary expenses, such as rent or house payments, utility bills, medical expenses and grocery bills. Then write down your other expenditures, such as those for clothing and entertainment. See where you can cut back on unnecessary expenses and how much you can save each month that can be applied to credit card debt.
You might not be able to stick to your budget, or your credit card debt may surpass your basic living expenses. In this case, the FTC notes that a reputable credit counseling organization can be of assistance. These services can provide you with a wide array of options and programs to reduce overall debt, not just credit card debt. To find a reputable credit counseling service, make sure it's member organization of the National Foundation for Credit Counseling (See Resources).
Debt Management Plans
For those with a large amount of credit card debt, one option offered by credit counseling organization is the debt management plan (DMP). This helps you pay back your creditors by way of a repayment plan established by your credit counselor. A DMP may offer you lower monthly payments, fees and interest rates. Those who stick with these slow-but-sure programs emerge debt-free with credit reports unscathed.
Enrolling in this type of program requires you to make regular deposits with the credit counseling organization each month, which is then used to pay your credit card debt. One hundred percent of what you pay to a credit counseling agency that's a member of the NFCC will be applied to your credit card debt.
According to the FTC, a successful DMP makes payments to the organization on a timely and regular basis a requisite. It may take two years or longer to pay off your credit card debt, although this is something that you should discuss with your credit counselor.
Caveat Emptor
Other companies offer a debt settlement program, which on first blush seem similar to a DMP, although they are quite different. If you procure these services, a party other than yourself negotiates a sum with your credit card companies that is less than the balance owed. In a manner similar to a DMP, the consumer gives the debt settlement company a deposit each month that is applied toward the settled accounts. The consumer also pays the debt settlement company a fee based on the percentage of the amount of debt negotiated.
While a debt settlement program may seem like an optimal situation, the NFCC points out that this is something that each consumer can do for himself. Credit card companies don't give particular difference to "professional" debt negotiators and will offer the same settlement to the consumer who contacts them directly.
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