Minimum payments are probably one of the biggest tricks that credit card companies came up with to keep consumers in debt. If you have mountains of credit card debt, you need to understand that sticking to the required minimum amount stated on your billing will not help you solve your financial problem. It will maximize the interest amount that you will pay your creditors because you are mostly paying off the fees and interests from the previous balance of your card. You are not really making significant payments towards your principal debt amount. Sure it keeps you from lowering your credit score but if you really want to be debt free, you need to do more than just stick to your minimum.
But what if you only have a limited cash? How can you make more debt payments with limited resources?
This is where debt consolidation can help. In truth, any form of debt relief will be more effective in getting you out of your debt faster. However, if you are concerned about your credit score and you have a stable monthly income to support your payments, then the best program is debt consolidation.
The target of debt consolidation is to provide you with a single lower monthly payment scheme that is stretched over a, extended term compared to your current. If you are wondering how this can be better than minimum payments, let us explain the two ways you can consolidate your debts.
First there is debt consolidation loan. The whole idea is to get a loan that has enough amount to cover all your credit card debts. Credit cards are notorious for their high interest rates. You want to eliminate this by paying off all your credit cards with a big loan. That way, you only concentrate on one payment every month. But to maximize the benefits of this debt relief program, you should take a loan that has a lower interest rate than your current. Get the average of your credit card interest and target a lower rate than that. Of course, there are some qualifications to be able to get the lowest rate that you can. You need either a high credit score or is not, a collateral. These will portray you as a low risk borrower. However, the problem is when you do not have either. If the only option you have for a loan is one with a higher interest rate, then it will be no different than minimum payments.
You can still opt for the other debt consolidation type: debt management. This program usually involves the assistance of a debt counselor. For a maximum of $50 a month, they will assist you in creating a DMP (debt management plan). This plan will contain your proposed payment every month. There will be no debt reduction. You will merely distribute your current balance over a much longer term. This makes the monthly contributions lower. The counselor will pitch this plan to your creditor so they will agree to the lower monthly payment scheme. The counselor will also try to negotiate for a lower interest rate so you pay off debt faster – since you will be paying more of the principal amount. But this is not a guarantee. The beauty of this program is you will not be allowed to use your credit cards – at least those enrolled in your account. That will keep you from adding more debt into your current balance.
Both programs are better than minimum payments because you have the chance to eliminate high interest rates and stop further debt accumulation. These will definitely help you complete debt payments a lot faster than sticking to minimum payments.