Debt reduction service has several pitfalls

Debt reduction service is provided by individuals or organizations who work as middlemen between you and your creditors. It is especially useful for those debtors who have accumulated debt from a variety of sources and find it very difficult to deal with their creditors.

The debt reduction counselors ask you to make a single consolidated payment to them every month. This money is then used by the counselors to pay the creditors. The service works best for unsecured debts, such as credit card debts. In the case of secure debts like mortgages on home or a car loan it is better to go for debt management or a debt consolidation loan.

Some of the debt reduction services use their connections to arrange lower interest rates on your debt. Some even manage to get the debts reduced. However, this is not always a good option to exercise because it may reflect negatively on your credit ratings. Several creditors may consider you a risk, and refuse to extend loans or credit in future.

The flip side of the coin is that you may have to declare bankruptcy if you are unable to repay your debts. In that event, you will be considered an even higher risk. It is therefore advisable to weigh both the options and opt for one that carries less risk.

Most counselors charge a commission for their services, which is generally about 10% on your monthly payment. Some of the counselors also get rebates from the creditors. Ideally, they should pas this to you, but this happens rarely. That is why care should be taken while hiring debt reduction counselors. Several of them are known to use unethical means, and can’t be fully trusted. You must especially ensure that they make all payments on time. Often, the debt reduction counselors use the money for other purposes. This is not in your interest because you have already paid the money, and ideally it should reach the creditors.

There is sometimes unpleasantness when you default on payments or delay payments. It is therefore important to clarify this point before hiring a debt reduction service. In fact, you must employ only that service with which you are comfortable. There is no point in employing a debt reduction counselor with whom you end up feeling more harassed and cheated.