Credit Card Debt Problem

If you are in credit card debt, you probably don't want to admit that your car payment is part of the problem. But it is. You're thinking, but I need a car and my car payment isn't related to my credit card.

In some ways, that's true. But from a cash flow perspective, your car payment severely limits your ability to pay off your credit card debt.

Sell your car. Buy a cheaper one (ideally, pay cash for the new car). Use the money that you're saving (on the car, the insurance, and everything else) to pay down your debt. You'll pay off your debt faster. In a few months or years, you'll be driving a better car than the one you have right now.

You probably have some sort of attachment to your car. Get over it. The attachment to the car is keeping you in debt.

Let me tell you my story: a year ago I bought an SUV with every feature the manufacturer made. It cost me nearly $40,000. The payments were about $600 per month. The insurance was outrageous and I felt like I was always at the gas pump. Besides that, I had a pile of credit card debt.

So I sold the car and bought a used Honda Civic. I cut my payments and insurance premium in half. And I feel like I'm never at the gas station. That simple solution alone added hundreds of dollars to my monthly budget. It sure made it a lot easier to pay off my debt.

Yes, it's painful. No, my car isn't as nice as what I used to have. But having all that extra money sure is nice. Now that I'm debt free, I just want to figure out what kind of a car I buy next.

The most popular solutions to the problem of heavy debt burden is to get a debt settlement or file for bankruptcy. Among these two debt settlement is preferred as it has a relatively less impact on credit report. In this article we assess the benefits and drawbacks of debt settlement.

Debt settlement is a process in which an organization will go to your lenders and negotiate with them regarding your debt. The purpose of the whole exercise is to reduce your debt burden. If a settlement company is good it can get your debt reduced by as much as 50%. This is  what a creditor needs and this is the most visible benefit of debt settlement. The amount of the debt is reduced, the repayment plan is made easy and often the monthly installments are spread over a long period. This makes life a lot more easier for the borrower.

However, debt settlement is not without its drawbacks. There are two things to worry about. First, is the cost of debt settlement. Debt settlement companies will charge huge amounts for their services. The usual range is between 10-15% of the debt amount. Paying this much amount upfront can turn your financial situation from bad to worse.

The second problem caused by debt settlement is the damage done to your credit report. The very fact that you are going for a debt settlement will show negatively on your report. But, it is still better than filing for bankruptcy, which will make a bigger dent in your financial credibility.

The whole process of debt settlement becomes meaningless if you don't change your financial habits for good. With all the drawbacks, debt settlement still provides a chance to get your finances back on track and should be used for it.