Four Ways to Cut Your Credit Card Debt

3. Debt Management Plans (DMPs)

A debt management plan is set up through a legitimate non-profit Consumer Credit Counseling Service. Essentially you hire them at a reasonable fee ($40 per month in some cases) to act as your trustee. They talk to your lenders and renegotiate your payment requirements (if your lender is willing to work with them). They'll even make your payments for you by drafting the money directly from your checking or savings account.

The goal with most debt management plans is to have them completed in less than five years. And, when you're done, you'll be completely credit card debt free.

Pro – There's no negative impact to your credit scores by signing up for a DMP. Most credit card issuers will work with the legitimate credit counseling services and report your account in good standing as long as they are getting paid each month. And your existing late fees will probably be waived.

Con – Even though there is no overt negative impact to your credit, you can expect lenders to avoid you while you're in your DMP, and rightfully so.

You also have to be absolutely certain that you are working with a legitimate organization. If you want to be sure, you can find a local CCCS operation here.

Be certain that any organization you speak with is a member of the National Foundation for Credit Counseling. If they are not, keep looking.

Suggestion – If you have a great deal of credit card debt and are not able to manage it on your own, this could be a good option for you.

Strategy Grade: A

4. Bankruptcy

Bankruptcy is legal protection from your creditors. There are two types of bankruptcy that consumers can generally file: Chapter 7 and Chapter 13. A Chapter 7 allows consumers to “discharge” or do away with almost all of their debts. There are some exceptions, as always, and the new bankruptcy laws make Chapter 7 much harder to file and much more expensive.

Chapter 13 is also referred to as a wage earner plan and has become much more common with the bankruptcy reform laws. You pay a monthly amount to a trustee who then distributes the money to your creditors.

Pro – If you file Chapter 7, you may walk away completely debt free, a good feeling to be sure. And, completing a Chapter 13 will still relieve you of a majority of your debts. Plus, depending on your state's laws, you may be able to keep your home and other property.

Con – A bankruptcy filing will stay on your credit reports for 10 years and your credit scores will be damaged by it almost the entire time. It will take some time before you can qualify for a loan at decent rates. There are also some lenders who will never do business with you again if you discharge one of their accounts in a bankruptcy.

Filing bankruptcy is also more expensive today than it has ever been. You can expect to pay well over $1,000 to file for Chapter 7 and you'll have to pay for mandatory credit counseling before you can even file.

Suggestion – Bankruptcy isn't always a bad option BUT it should usually be considered your last option.

Strategy Grade: D