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Debt Settlement Techniques Explained
Debt settlement is a strategy that helps you to reduce your debt burden. In this approach, the debtor and the creditor agree to reduce the total amount to be and clear the outstanding balance. You could either deal directly or choose to negotiate with your creditor through a debt settlement company. The former option is definitely less expensive but the chances of creditors accepting a settlement are very limited. Further, both the options often contribute to impacting your credit rating. Having said that let us understand the different debt settlement techniques that can be employed to reduce your debt.
Debt Avalanche Method
This method can be considered as an accelerated debt repayment strategy wherein you pay the minimum amount specified for each debt and then pay the debt that charges the highest rate with any remaining money. Once you pay off the debt that carries the highest interest, you can focus on the next high-interest loan. Continue to employ this technique until you clear off all your debts. In order to successfully implement the debt avalanche program, you must allocate a part of your income. This amount should not impact your living expenses in any manner whatsoever.
Debt Snowball Method
This is a debt reduction strategy and it can be effectively applied if you have more than one debt. You start by focusing on repaying the account that has the smallest outstanding balance. However, you need to keep paying the minimum due on larger debts. After repaying the smallest debt, you can start focusing on the smallest of the remaining debts. You can continue following this process and pay off the largest debt in the end. Typically, the debt snowball method is employed to repay revolving credits, for example, outstanding credit card balances.
Debt Reduction Through Balance Transfer
The balance transfer technique involves you moving your outstanding debt on one credit card into another card, typically a new one with a lower interest rate. This helps you to reduce your overall interest burden, penalties, and enjoy better benefits like travel miles or rewards points. Many credit card providers come up with balance transfer offers in order to attract cardholders and enhance their earnings. Some credit card companies might even offer an interest-free period of 6 to 18 months for you to pay off the transferred sum.
Debt Consolidation
If you are not in a position to employ any of the above-mentioned strategies, you can employ the debt consolidation technique. This is a safer strategy to employ because it does not involve any negotiations with the creditors and your credit rating will also not be affected, unlike the debt settlement option. In this case, you take out a new personal loan that is large enough to repay all your existing debts. Then, you just repay the new loan, referred to as the debt consolidation loan. It brings down the number of monthly payments to be made to just one and you will be able to lead a stress-free life.
Note: CompareGulf is an online market research consultant, our experts would support you in choosing right financial choice and also loan products from the market. This blog should be used only for knowledge and information purposes. Consult with bankers before signing any agreement.