When we hear about credit cards, it is common to relate them to extreme debt situations. And although various financial consultants and even financial institutions themselves have warned that plastic money is a means of payment but not an extension of income. But many a times, for many individuals debt simply gets out of control.

To pay off a credit card debt, a person has three options:

1. Restructuring
2. Consolidation
3. Debt Removal

These are dependent on where the user is in terms of income, expenses and the amount of debt, but also other factors that the user may have, such as credit history.

Therefore, if you find yourself in this situation, it is important to know in detail the advantages and disadvantages of each of the above option in order to have as much less impact, as possible.

1) Restructuring

The first and most recommended alternative is debt restructuring. In this option, the terms of the credit are negotiated, that is, the term or the interest rate.

This option is ideal because it does not affect the debtor’s credit history and two options are available:

1. Lengthen the time to pay the debt with a reduced monthly payment, but with a higher interest rate.
2. Shorten the term, which decreases the interest rate but the monthly payment goes up.

Here the user, must analyze what is the best option depending on his/her financial condition. i.e.

• Having comfortable payments at a higher cost or
• Higher payments in exchange for a less expensive debt

The amount of the debt (in the case of restructuring) remains the same. The idea is that banks recover at least the income they had estimated for each type of credit.

However, remember that, restructuring is an option that should be sought in the earliest stages of over-indebtedness, since banks do not offer it when you already have missed payment for three to five months or more.

Depending on the bank’s policies, they will decide whether or not to offer restructuring. There are many banks that do not offer the restructuring because it does not suit them, since their business is that people pay the minimum, which is a reality. It varies for each case. There are banks that offer the option to selected customers only.

2) Consolidation

The second option is consolidation, which is attractive for individuals having several loans, or in this case, cards, since all debts are unified. If you have five different credits, you can unify them and lower the overall interest rate.

However, in reality this benefits little to the debtor, since in the end, they will end up paying a similar monthly payment, and the amount rises too much in a single account. The most advisable is to have several small accounts, and go negotiating and liquidating all one by one.

In addition, this option is not exempt from an impact on the credit history of the user, since if he/she fails to comply with the agreement reached with the bank, negative impact is seen on the credit history.

Debt Removal

As the name indicates, this option is about negotiating a discount on the debt with the bank. However, this is the last resort due to the serious consequences it has on the credit history and the time it takes the user to complete this process.

For the bank to agree to negotiate a takeover, you must first stop paying, because you have to see that the customer is really in a state of insolvency, and you will not be able to pay otherwise.

In this option, there are no fixed percentages and it is more a strategy (of the bank) to have a healthy portfolio. After reviewing the history of the user and his/her account, bank can offer discounts to pay and close the account.

It is important to emphasize the impact this will have on the credit history, as resorting to a removal, leaves a mark that will prevent you from accessing another credit.

Many people do care about their credit history, but they will not be able to pay otherwise, since there is the option of continuing to borrow, or accept reality, before you stop paying the bank. If this is your situation, it is important to know that you are not obligated to accept what the bank offers you.

Many times the banks offer restructuring that the client will not be able to pay but, in desperation, clients accepts, and pays one, two, three monthly payments with a lot of effort, and later, no longer pays because of the same problem: the client is insolvent.

Is it convenient to go for debt settlement?

Credit repair companies are companies that act as negotiators of the debt payment, that a person has with a bank or financial institution.

Among the terms to which the repairer arrives with the bank are a restructuring or removal of the debt, which ranges from a certain percentage of the total amount. And, once paid, help the person to clean his credit history by granting a new loan.

Check out: Risks associated with debt settlement companies

A review is made of how much the person earns and can save monthly, based on developing a plan to pay off their debt.

One of the problems of the repairers is that they force you to save in a concentration account. When you take service of credit repair company, they analyze how much you owe and, based on that, they tell you their charges (which are very high prices). And in addition you have to save a monthly payment to the account, to which you do not have access.

That is, individuals are obliged to pay a monthly fee, but when it comes to to individuals with unstable financials, there is the possibility that they also come to owe the repairer.

Some repairers negotiate behind the scenes the debt of their client and offer no legal protection in case the bank sues the user.

Author Bio:

Hi, I am Nikesh Mehta owner and writer of this site.

I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business.

I can be reached at nikeshmehta@allonmoney.com. You may also visit my LinkedIn profile.