Should I Pay Off Credit Cards or Go to Debt Relief?

A large amount of credit card debt is scary and can make you feel helpless. You know something has to change, but you don't see a way out of your hole. Ideally, you'd just pay off your cards and move on with your life, but it isn't always that easy. In times like these, debt relief may sound like a potential alternative.

Minimum Payments

Even if you have a lot of debt, you might think you can find your way out of trouble. You could make minimum payments for decades to get out of debt, but you'll also pay tons of interest in the process. Under the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009, you can now see how long it will take to pay down your cards with just minimum payments. After seeing the true costs of this method, you may decide another method might be more beneficial.

Debt Relief Basics

Companies abound that claim they're able to settle your debts for less than you owe. While this is true, debt settlements also come with significant risk. There's no guarantee that a credit card company will agree to settle with you. To help your cause, the debt relief company will encourage you to stop making your minimum payments. After a while, you'll have leverage to settle, but your credit score will be destroyed because of all the missed payments. Worse, if your creditors don't want to settle, they can sue you for your unpaid balance.

Debt Management Program

A more conventional form of debt relief is to seek help from a credit counselor. In many cases, this will lead to a debt management program administered by the counseling agency. This arrangement doesn't reduce your balances, but you'll receive reduced interest rates, thereby allowing you to pay off your debts in five years or less. You'll likely have to close out your credit accounts, which can hurt your credit score, but your high debts have likely hurt your credit score already. This method is preferable if you don't mind taking the short-term hit, but don't want your credit score in tatters down the road.

Doing it Yourself

Although an outside agency has plenty of experience and know-how, you can perform many of the same tasks. You can call your credit card companies and see if they'll voluntarily reduce your interest rate; you can also see what it would take for them to settle your debt. If you're not a shrewd negotiator, you can try using a computer program to create a budget for efficiently paying down your cards.