The problem with credit cards is that making minimum payments does not substantially reduce the total payable balance. You end up paying primarily for only the accrued interest charges, while the principal amount remains untouched, making it easy to accumulate an ever-increasing debt. If this happens to you, limit your credit card usage and examine ways to meet the demands of your credit card debts. Some debtors attempt credit card debt reduction while others opt for the less credit-damaging consolidation of their credit card debts under one creditor.
Credit card debt reduction employs the intervention of debt negotiation companies. To lower your debts, debt negotiation consultants negotiate with your creditors to lower the amount you owe. If the creditors agree to reduce the amounts you owe, you guarantee that you'll pay off the reduced amount at specified terms. The solution remains on your credit score record for about seven years, making it temporarily difficult, and in some cases impossible, for you to apply and qualify for credit. Debt reduction reduces the principal amount of your debt, and it is an alternative to filing for bankruptcy. Debt reduction lowers your monthly payments using a settlement program that can result in a 50 percent or greater debt reduction.
Debt consolidation, on the other hand, is a debt payment vehicle that aims to combine and spread your outstanding accounts over an extended period, using only one creditor. The convenience and practicality of consolidating your credit card debts and making just one payment every month is an important benefit of debt consolidation. It indicates you are taking control of your finances and debts by using only one creditor. When you lump all your unpaid credit cards into a single credit card, you minimize the chances of missing any payments because you have only one monthly payment to remember.
Pitfalls and Disadvantages
Debt consolidation under a single creditor may offer flexible terms, but make sure you calculate exactly how much you are paying for this convenience. Initial transfer fees are common, and fluctuating interest rates can affect future payments. As long as you make your agreed-upon payments on time, however, your credit score will not be damaged. The alternative, debt reduction, lowers your credit score and affects your ability to qualify for loans for years. Debt reduction agencies can't guarantee that the creditors will agree to reduce your debts. They also cannot guarantee that collection phone calls will stop.
If you find yourself deeply in credit card debt, consider the benefits of credit counseling to manage your credit card debt effectively. By getting sound credit counseling, paying off your credit card debts is faster and offers fewer cost implications. Credit counselors help you face the challenges of your financial obligations and commitments. For a service fee, a credit counselor can guide you towards financial freedom. The credit counselor assigned to you can help you to assess and choose between a debt consolidation, a debt reduction or other options. Credit counseling agencies can also negotiate with creditors on your behalf to reduce interest rates and late fees.
- BankRate.com: Debt Consolidation- Cure or Continued Credit Problems?
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- National Foundation for Credit Counseling: Credit Counseling
- Minnesota Department of Commerce: Use Caution When Choosing a Credit Counseling Service
- SuperPages.com: How to Choose a Debt Management Program
- Top Consumer Reviews: Debt Relief Programs- Reviewed and Ranked
- MSN Money: Your 3 Worst Debt Consolidation Moves
- RISMedia: How to Avoid Getting Hooked by Debt-Reduction Schemes
- Federal Trade Commission: Settling Your Credit Card Debts
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