Getting rid of your debt is an excellent way to raise your credit score and give you peace of mind; however, you must choose the strategy that works best for you specific financial situation. In other words, debt elimination methods are not one size fits all. By understanding the pros and cons of each method, you will be able to make an informed decision about your plan of attack.
Payment Plan
One way to dump your credit card debt that doesn't involve applying for a loan or damaging your credit is by paying all of your debt off by yourself. To pay down your debt strategically, you may choose between two methods. The first strategy involves paying off the credit card with the lowest balance first. People who choose this method typically do so because of the motivation they get from seeing their balances paid down quickly. Another method is to pay down the balance with the highest interest rate first. In doing so, you typically save money by paying as little interest as possible. Call your creditors and ask for lower interest rates so that you can pay off your debt as quickly as possible.
Debt Consolidation
Debt consolidation may help you to pay off your credit card debt faster if you can qualify for a loan with a lower interest rate than your current credit card interest rates. Banks and consolidation companies generally advertise very low rates on these loans, but only those with excellent credit usually qualify for those rates. The other situation where debt consolidation may be helpful is if you have trouble making on-time payments to all of your various accounts, since consolidation gathers up all your debts under one loan. However, you must be careful when using debt consolidation, since there's nothing keeping you from spending on the credit that becomes available after the consolidation loan wipes out the balance.
Debt Management Plan
Anyone overwhelmed by their debt situation may benefit from working with a trustworthy credit counseling organization. Only credit counselors have the power to put you on a debt management plan, which is a predetermined period of time over which you will pay off the entirety of your debt. Once you decide to use a DMP, your credit counselor negotiates with your creditors to lower your interest rates or payoff balances, then calculates a period of time over which you'll pay off your debt. DMPs do not damage your credit score because the credit agencies view management plans as you taking responsibility for your financial situation.
Settlement
Debt settlement is very damaging to your credit score because your creditors need to believe that you're headed for bankruptcy before they agree to settlement, which usually means defaulting on your payments for a matter of months. Be careful of working with so-called debt settlement companies, which are often scams and may charge high fees. Instead, work with a credit counselor or negotiate your own settlement by saving money while you default on your payments, then offering your savings as the settlement amount. Usually, creditors agree to settlements around the six-month mark after you've stopped paying. The lump sum settlement is generally between 25 to 75 percent of what you owe, according to MSN Money.
Bankruptcy
When you think about bankruptcy, you probably think of starting over from scratch, but eliminating all of your debt. In reality, that scenario only applies to one type of bankruptcy, which is Chapter 7. This type of bankruptcy involves the liquidation of your assets in exchange for a discharge of your debts. Chapter 13 bankruptcy is more like a payment plan, and is reserved for people with steady incomes, of whom generally have been hit with a one-time financial crisis, such as a period of unemployment, unexpected medical expenses or divorce. In exchange for payment over a three-to-five year period, those under Chapter 13 may keep their assets, and, at the end of the payment period, the some of their debts are forgiven.
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