In Your Situation Is A Credit Card Debt Reduction Option Right For You?

Credit card debt reduction is a highly popular debt reduction program which requires that the credit card debtor settle their debts in a one-off payment. Many credit card debtors find that the debt reduction process works really well, in particular it produces a substantial level of debt reduction often in excess of 50% of the original debt. The question which you need to ask yourself, is whether or not it will work for you?

How does this Credit Card Debt Reduction Operate?

Credit card debt reduction is extremely effective as a debt reduction program because the credit card debtor stops paying their credit cards and instead they sign up to a debt settlement company. When they do so, they make monthly payments into a special account instead. The debtor continues to pay into this account for a few months, in an effort to build up the money in it. Also they are likely to sell off some assets so as to support this process. The aim is to get a sum together in the order of approximately 50% of the original debt. Once the fund increases in size, the debt settlement company then begins the negotiation process with the credit card companies in an effort to reduce the debt principal.

Choice: Credit Card Debt Reduction or Debt Consolidation?

In this example a credit card debtor signs up to a credit card debt consolidation program. They have a debt of say $20,000 at an annual interest rate of 18% across all their credit cards, and are paying back a minimum payment of $400 per month. At that rate it will take just under 96 months to repay the debt.

However, when they sign up to the credit card debt consolidation plan, the interest rate is reduced to a smaller figure such as 12%. So while still paying only $400 per month, they will repay this debt in just less than six years. While this does not sound impressive, it is still a saving in terms of 2 years in duration. From an economic standpoint it will save the debtor an enormous $9380 in interest.

While this is good, when compared with credit card debt reduction, if the credit card debtor only manages to save 40% on their debt, it will mean that they only pay back $12,000 (60% of the debt principal), in just over 12 months. Compare that with just 6 years in order to payout a total of $28,000 on the credit card debt consolidation program, which is 5 years less duration and $16,000 less interest. Not bad, if you can manage it.

So, we can see that in terms of timescale and debt savings, credit card debt reduction works extremely just great, so are there any downsides with credit card debt reduction?

Listed below are the downsides which go along with credit card debt reduction:

• Court cases
• Tax liability
• Downgrading credit score

Downgrading of credit score:
When you go through the credit card debt reduction process, it will affect your credit score, because you cannot go many months without paying any creditors and not expect your credit score to be the same as it was before you begin this exercise.

Court cases:
Also, some of your creditors may decide to take you to court, although if you are taken to court, the court can only force you pay back a small percentage of the debt each month. Furthermore, because credit card debt is unsecured, unlike house and auto loans, your creditors cannot repossess your property. So court cases are not as bad as you might be tempted to think.

Tax Liability:
Finally, any monies which are reduced from the debt principal are liable to taxation, unless you can declare yourself destitute. In such a case this can only be achieved by filing for bankruptcy. So prior to signing up to a credit card debt reduction program, do your math and make sure that even when adding in taxes due, that the program still works well for you.

Should You Consider Credit Card Debt Reduction?

If you want to know if this debt reduction is the right strategy for you, then you have to ask yourself some probing questions. It is vitally important that you understand that credit card debt reduction only works for credit card debtors who have serious debts. It is also an ideal debt relief strategy for debtors who have very large debts, who don’t know what to do about them, and who are probably thinking about filing for bankruptcy.

When compared to bankruptcy, the downsides of credit card debt reduction are not as bad as you might think. Because if we look at bankruptcy it destroys your credit score for a very long period of time (Either 8 or 10 years, depending upon the type of bankruptcy which you file), and usually results in the fire-sale of most of your assets.

For many credit card debtors contemplating bankruptcy, they would actually do better on a credit card debt reduction program instead. Although it must be remembered that, with credit card debt reduction the credit card debtor has to make a one off debt settlement. This is usually in a timeframe of approximately one year. Obviously not all credit card debtors would be capable of coming up with such a big settlement so quickly, in which case bankruptcy might be a better option for you.

So Is A Credit Card Debt Reduction Strategy Right For You?

Trying to figure out the best credit card debt relief strategy is a big task. While we can briefly outline the pros and cons of each debt reduction option, it is difficult to outline which strategy is the correct one for you. This is because everyone has different requirements. Also what will work well for one credit card debtor may well not work so well for another debtor.

While credit card debt reduction is a great debt reduction strategy, it is not a one fit all type solution. Even when compared to bankruptcy, it is easy to see that while most credit card debtors will do better on a credit card debt reduction program, depending upon circumstances, in some cases bankruptcy is the superior option to take.

For anyone considering credit card debt reduction, take the time out to get to understand your individual situation. Do some research into the various credit card debt reduction strategies out there. Because one thing is certain, there is a debt reduction strategy which will work for you, and perhaps credit card debt reduction may well be just that one.