When you're paying off your credit card debt, the last thing you want to do is waste time and money on methods that don't work, or worse yet, are illegal. Depending on the degree of your credit card debt situation, you may choose to pay off your debt on your own or obtain assistance through a credit counselor.
Self-Help Payment Plans
You need a plan of action when paying off your credit card debt on your own. One method is called the "debt snowball plan" in which you pay off the smallest balance first (while making minimum payments on the rest of your cards), then apply the money you were paying to that debt to then pay down the next-smallest balance, and so on. Others choose to pay off the debt with the highest interest rate first. As of the Credit CARD Act of 2009, your credit card statements need to list the amount of money you must pay each month to pay off your card in three years. You may also choose to use those guidelines as a payment plan. Whatever route you choose, commit to following through with it to truly unburden yourself of credit card debt.
Debt Consolidation
A debt consolidation loan pays off your existing credit card balances and pulls them all under one loan, so that you only make one payment with one interest rate each month. Oftentimes, these loans are advertised at rock bottom interest rates to lure in applicants; however, if your credit is less than stellar, you probably won't qualify for those rates. Compare your existing rates with those of the loan offer. The biggest benefit of consolidation is convenience, but that may not be worth the risk of fighting debt with even more debt. Since a consolidation loan wipes out your balances, you may be tempted to use your newly freed credit. Stay committed to paying off your debt, and use the loan as a solution and not just symptomatic relief.
Debt Settlement
When you settle a balance with a credit card company, you pay a one-time lump sum that is generally between 20 and 75 percent of the full balance owed. While this method eliminates your balance, your credit score will take a nasty blow. First of all, to qualify for debt settlement, you need to appear to be at risk for bankruptcy, which generally means that you've defaulted on your payments for at least three to six months. Missing a single payment by 30 days or more may negatively affect your score by as much as 110 points, so doing it month after month is extremely damaging. Also, your account will appear as "settled" or "settled for less than owed," which may be a warning sign to lenders that you've had trouble with your finances in the past, making it difficult to obtain new credit.
Debt Management Plan
To qualify for a debt management plan (DMP), you must be working with a credit counselor who recommends a DMP as a viable option for your particular financial situation. Under this plan, your counselor will negotiate a lower interest rate and/or payoff balance with your creditors, then set up a time frame, by the end of which you will have paid off your debt in full. A DMP will not negatively impact your credit score; however, it may signal that you are a higher credit risk to lenders.
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