By John Ulzheimer

Question:  This question is for any of the CNBC Money Mentors.  First, I want to say, "Thank You".  I have really enjoyed and learned from the show The Millionaire Inside. 

My question is regarding debt consolidation verses debt reduction.  I have a fico scores in the mid 700s.  I have about 25,000 in credit card debt.  I am very fortunate to have very low rent, so I don't own a home.  However, some day I want to have a saving and I want to own a home.  I have an excellent career, working for the county, so I have benefits and make about $70k a year.

I have never been late on my payments.  However, after paying all my bills, I don't have much left.  I do try to pay a little over on each of my cards and my car loan.  I also have a student loan.  However much I continue to pay, I don't seem to see the balance disappearing.  I was thinking of Credit Solutions, a company that helps negotiate you debt reduction; however, I fear my credit will be badly affected.  Would you recommend debt reduction or debt consolidation?

-Alicia A.

Answer:  Thanks for taking to time to drop us a note and I'm glad you enjoyed the show. 

Mid 700's….very solid.  Let's keep them right there please.  Do NOT go to any company to deal with your debt.  You're not a good candidate for debt settlement (what you call debt reduction).  Debt settlement companies actually counsel you to stop paying your bills for several months.  Their strategy is to get your creditors so desperate for a payment that they'll be open to settling for less than you really owe.  Sure, it saves you some money but you end up with trashed credit reports and horrible scores, for the next 7 years. 

$70K per year and low rent equals very good take home pay.  I'd suggest taking a page out of Carmen's playbook and log every dime that you spend each month.  You could be out of credit card debt in about 2 years with some aggressive self budgeting.  I have clients that make about that amount and have finally “seen the light” that some of the things they spend money on each month are, in fact, luxuries instead of basic human needs.  For example, extended cable, dinner out too many times, manicures, and cell phones are a drain.  Aggregate these things cost about $450/month.

FIND WAYS TO INCREASE YOUR DISPOSABLE INCOME.  I promise they're there.  

It will save your scores, won't cost you a dime, and you should see your scores in the high 700's or even 800's as you get closer to paying them off.

All the best! 

EXCERPTED FROM JOHN ULZHEIMER'S BOOK

You're Nothing But A Number

John Ulzheimer shares his 16 years of experience working for FICO and Equifax with you in this empowering and easy-to-read book on the credit system.

Publication Date: September 7, 2007

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