Credit card debt reduction is a very popular debt reduction methodology which requires that the credit card debtor settle their debts in a one off payment. For a great many credit card debtors the reduction process works really well, in particular it produces a substantial level of credit card debt reduction often in excess of 50% of the original debt. The question which you need to ask yourself, if you are considering credit card debt reduction, is whether or not it is the right for you?
How Does Credit Card Debt Reduction Work?
Credit card debt reduction is effective as a debt reduction strategy, simply because with debt reduction the credit card debtor stops paying their creditors and instead they sign up to a debt relief company whereby they make monthly payments into a special bank account. The debtor continues to pay into this account for a few months in an effort to build up the money in it. More than likely they will also sell some assets in order to bulk up this fund because the aim is to get a sum together in the order of approximately 50% of the original debt. Once the fund gains in size the debt relief company then begins the negotiation process with the credit card company in an effort to reduce the principal.
Credit Card Debt Reduction Versus Consolidation
By way of example, a credit card debtor who signs up to a credit card debt consolidation program, who has a debt of say $20,000 at an annual interest rate of 18% across all their credit cards, and who is paying back a minimum payment of $400 per month, will take just under 8 years to repay the debt.
However, while this is good, let’s compare this with credit card debt reduction. If the debtor only manages to save 40% on their debt, it will mean that they only pay back $12,000 (60% of the debt principal). This is done in just over a year versus just 6 years in order to payout a total of $28,000 on the credit card debt consolidation program. So here we see a difference between consolidation and debt reduction which saves the debtor $16,000 in interest.
Not bad, if you can do it.
So, we can see that in terms of timescale and debt savings, credit card debt reduction works extremely well. So are there any drawbacks?
The Drawbacks of Credit Card Debt Reduction
Listed below are the drawbacks which go along with credit card debt reduction:
· Downgrading of your credit score
· Possible court cases
· Tax liability on any monies which have been reduced from your debt
These are serious considerations, because with credit card debt reduction, it will affect your credit score simply because you cannot go many months without paying your creditors and not expect your credit score to be unaffected. Also, some of your creditors may decide to take you to court. Because unlike bankruptcy, your creditors are not obliged to accept the negotiation terms put forward by the debt relief organization. Finally, any monies which are saved are liable to taxation, unless you can declare yourself as destitute, which you can only be achieved by filing for bankruptcy.
So, is it worth your while even considering credit card debt reduction?
If you want to know whether or not credit card debt reduction is for you, then you have to ask yourself some tough questions. Importantly you need to understand that credit card debt reduction only works for credit card debtors who have serious debts.
So if your debts are not too far out of control why would you take up credit card debt reduction when, although it produces great signs, it will also result in so many drawbacks?
The answer to this question can be answered as follows:
Credit card debt reduction is an ideal debt relief strategy for debtors who have a serious debt problem, and who are probably considering bankruptcy.
When compared with bankruptcy the drawbacks of credit card debt reduction are not so bad. This is because bankruptcy obliterates your credit score (for a period of 8 to 10 years, depending upon the type of bankruptcy which you file) and usually results in the fire sale of most if not all of your assets.
For many credit card debtors, who are thinking about filing for bankruptcy, could actually do better if they opted for credit card debt reduction instead. Although it must also be borne in mind that with credit card debt reduction the debtor must to make a one-off debt settlement, usually in a timeframe of twelve months or so. This means that if you credit card debts are excessive and your income is small and you possess little, by way of assets which you can sell off, then in this case bankruptcy will more than likely be the better way to go.
Trying to Figure out the Best Credit Card Debt Reduction Strategy
Trying to figure out the best credit card debt relief strategy is a difficult. While we can briefly outline the positive and negative points of each individual credit card debt reduction option, it is difficult to outline which strategy is the correct one for you. You see everyone has different requirements and what will work well for one debtor, may well not work so well for another.
While credit card debt reduction is a great debt relief methodology, it is not the perfect one for every debtor. Even when compared to bankruptcy, it becomes obvious that while most debtors will do better on a debt reduction program than they would on a bankruptcy program, depending upon circumstances, in some cases bankruptcy is the better path to take.
Our advice then to you, if you are considering credit card debt reduction, is to take the time out to understand your particular situation, and then do some research into the various debts reduction strategies which are out there. Because one thing is for sure, there is a debt reduction strategy which is appropriate for you and credit card debt reduction may well be the ideal one.