Debt Consolidation | Debt Consolidation Vs Debt Reduction

You have probably seen the terms debt consolidation and debt reduction all over the internet. If you are financially sound this is probably something you have just skipped over, and not paid much attention to. If however you are among the large percentage of people world wide who are financially hurting it might be a good idea to learn what the differences in these terms are.

Let's first explain debt consolidation. Debt consolidation is when you take out a loan against your house or get a personal loan and use it to pay off all your debts so that you have only one monthly payment to your creditors. Usually you try to get a loan that has a lower percentage rate than your credit accounts do so you are saving money. Additionally if you close all of your accounts, meaning you can't use them anymore, you can get your percentage rates at your creditors lowered, as well as payments, late fees and other breaks.

When it comes to debt reduction though, you have to be very careful to weigh your options. You see debt reduction will basically demolish your credit score. Now this isn't a problem if you already have a horrible score but if you have a decent score, well debt reduction isn't the best way to go.

Here is what happens with debt reduction. You call up the company and they take all your information. Then based on your creditors they tell you what they think they can get as a settlement amount. Let's take a Visa card, say you owe $3,000 on it. Depending on who the card is through, the company will say they can get it lowered to $1,500. There is a catch though. First you have to not pay on the card at all for up to 6 months. The company will tell you exactly how long.

In that space of time your creditors will of course send letters, notices, emails and will be calling on the telephone, trying to get you to pay. Dont. Instead the debt company will tell you to save up a certain amount of money during this time which you will then use to pay the Settlement amount.

There are a lot of problems with this debt reduction though. First the company is telling you to save money for 6 months, but chances are if you get this bad into debt you won't be able to save money very well. Next they offer to save the money for you, you send them the payments each month and they save it in an account for you, to use to pay off the companies.

This is where you have to be really careful to make sure the company is legitimate, because they are dealing with your money and your credit. In most cases it isn't recommended to follow a debt reduction plan just because you have so much at risk, however if you feel you need to, just be careful and do your research.