Todd Christensen, AFC, MIM, MA
You have several options to choose from when it comes to debt reduction. Each option has its own pros and cons you should understand.
What are your options for getting out of debt?
First-party DIY debt reduction options
You have four basic options to accelerate your debt repayment on your own:
1. The Debt Avalanche: Applying any extra money to your debt with the highest interest rate every month while making minimum payments on all other accounts.
2. The Debt Landslide: Applying an extra payment to the account you opened most recently.
3. The Debt Snowball: Applying an extra payment each month to your account with the lowest balance.
4. The Debt Cascade: Applying minimum payments on all your accounts, and not using your credit cards anymore.
Working directly with your creditor does not have to be the only option. You have the option of inquiring about the following concessions:
1. Lowering Your Interest Rate.
2. Reducing or Eliminating Your Fees.
3. Forgiving Some of Your Principal Balance.
You can find assistance from debt professionals that offer three basic services.
1. Debt Management Plans (DMPs): Non-profit credit counseling agencies offer DMPs by working directly with your creditor to lower interest rates, waive late fees, and arrange a new debt repayment agreement.
2. Debt Settlement: Third-party settlement companies offer to negotiate your debt balance on your behalf (see second-party option number three).
3. Bankruptcy: Whether you file for Chapter 7 (liquidation) or Chapter 13 (repayment), you may be able to rebuild your credit score to a good rating within two to four years with focused effort.