The average American family has 12 credit cards and nearly $10,000 in credit-card debt. More than half of these households have difficulty making the minimum monthly payments, and many are using plastic to cover daily living expenses such as food, gasoline, co-payments for doctor visits and prescriptions, personal care items, and even the morning latte. Late fees and over-the-limit fees are increasing, and more and more households are missing one or more payments altogether.

If you have too much credit card debt, now might be the time to stop this destructive cycle and get the help you need from a debt settlement or debt consolidation program. This article discusses the pros and cons of debt settlement and debt consolidation.

Making the Minimum Monthly Payments

If you want to become debt free by making the minimum monthly payments, think again! There are no advantages to this form of debt reduction. For example, if you have $15,000 of credit card debt with three banks at a blended interest rate of 18%, it will take you 382 months to get out of debt by making the minimum monthly payments. That's nearly 32 years! And what's even worse, you will pay $21,923.06 in interest, in addition to the $15,000 that you already owe. That's a grand total of $36,923.06!

Debt Settlement or Debt Negotiation

With debt settlement, negotiators communicate with creditor(s) on your behalf to settle your balances to "reduced and agreed-to" amounts. Once you enroll in a program, your debt negotiation team opens a trust account for you. You must deposit a portion of your outstanding debt (usually 50%) into the account over a specified time period (generally 2 - 4 years). Once the required amount has been deposited, your debt negotiators communicate with your creditors to settle your balances to lower amounts.

Pros of Debt Settlement

1. You make one monthly payment to a trust account, and get out of debt much faster than by making the minimum monthly payments or by using debt consolidation. With debt negotiation, you save the most time and money.

2. Consumers who have used debt settlement report that they have saved anywhere from 30% to 70% on their outstanding debt. However, results vary from person to person.

3. Debt settlement works best for those who have $10,000 or more in credit card and/or other unsecured debt, such as medical expenses. Why? Most debt negotiation companies require $10,000 or more of unsecured debt to qualify for their services.

Cons of Debt Settlement

1. You can no longer bank (checking, money market, etc.) with any of the credit card companies that are part of your debt settlement. The creditor might seize your assets as part of their own collection activity.

2. Debt settlement can adversely affect your credit score.

3. Although you have enrolled in a debt settlement program, calls and letters from creditors and collection agencies might continue. Typically, your negotiation team notifies all of your creditors that you have enrolled in their program. However, participation in debt settlement does not necessarily stop "lawful collection activities."

4. Occasionally, a creditor might refuse to negotiate with your debt resolution team. In such cases, you are responsible for the repayment of the debt on the creditor's terms.

5. In addition to the money that you deposit into a trust fund, you must pay a fee to the debt resolution company for its services. This can be as high as 50% of the settled amount.

Debt Consolidation or Interest-Rate Arbitration

Suppose that you have $30,000 of credit card debt with ten banks at a blended interest rate of 22%. By only making the minimum monthly payments, it will take you 137 months (11 years and 5 months) to get out of debt. And what's even worse, you will pay a total of $52,068.00 in interest, in addition to the $30,000 that you already owe. That's a grand total of $82,068.00!

Using this example, debt consolidation can significantly reduce the potential of $82,068.00 of indebtedness. So, let's proceed to how it works.

Debt consolidation takes your high-interest credit cards and blends them into one, lower-interest monthly payment that you can afford. The payment is made to a debt consolidator, who sends the funds to your creditors.

Using the example above, let's say that a debt consolidator negotiated a new blended interest rate of 12% on your credit card balances. By making a $500 fixed payment every month, it will take you 93 months (7 years and 9 months) to pay off your existing balance. You will pay $16,043.43 in interest, as opposed to $52,068.00 by making the minimum monthly payments.

Pros of Debt Consolidation

1. The amount of interest that you pay over the long term is markedly reduced.

2. Late fees and over-the-limit fees are usually eliminated.

3. Unlike bankruptcy, debt consolidation is not a public record.

4. Debt consolidation works best for consumers who have less than $10,000 in credit card debt. Why? The majority of debt settlement companies require a minimum of $10,000 of credit card and/or other unsecured debt to qualify for their services.

5. If your accounts have been past due, many creditors will reflect your accounts as current after 1-3 consecutive payments.

Cons of Debt Consolidation

1. Unlike debt settlement, debt consolidation does not lower the balances that are owed on your credit card accounts. There is only a reduction in interest rates, and the elimination of late fees and over-the-balance fees.

2. If you want to save the most time and money, debt consolidation is not the answer. Consider debt settlement.

Debt settlement and debt consolidation have worked remarkably well for thousands of people over the years. But like anything worthwhile, personal commitment is required. For example, you might want to get a handle on your spending habits. Write down everything you spend for a month, and make saving money a top priority. Get a cheaper cell phone plan, use free online bill pay instead of postage stamps, switch to basic cable, cut out the daily latte, watch bank fees, and so forth.