Debt reduction is not a one-size-fits-all solution. There are different ways you can approach it, depending on how much you owe and what type of interest you’re paying.

Here’s a closer look at four of the most common debt relief options.

1. Debt consolidation to reduce credit card debt

You can choose to consolidate debt if you have several different loans or lines of credit to repay. In simple terms, debt consolidation means combining multiple debts into one. For example, you can use a personal loan to consolidate debt from multiple credit cards.

Balance transfers are another option for reducing credit card debt. In this case, you would open a new credit card account, ideally at a low or 0% APR, and then transfer existing balances to this card. Typically, the 0% interest lasts for a specified term, after which the balance transfer amount will be subject to the balance transfer interest rate.

Debt consolidation means you’ll only have one payment to make each month. However, it may or may not save you money on interest. It is also important to understand the pros and cons of debt consolidation.

2. Credit counseling

Credit counseling involves meeting with a credit counselor to discuss your budget, debt, and finances. A credit counselor can review your spending and debt, then help you create a personalized plan for managing both.

Seeking a credit counselor might be right for you if you just need help creating a workable debt repayment plan. A credit counselor also can help educate you on the underlying budgeting issues that may have led to your over-debt in the first place.

Many non-profit credit counseling agencies offer their services for free. However, there are also for-profit credit counseling agencies.

You can find a credit counseling agency through Credit Counseling Canada, THE Canadian Association of Credit Counseling Services or the Credit Counseling Services Association of Ontario.

You can also research the agency through the Better Business Bureaus to check for complaints.

3. Debt management plans

If you are working with a credit counselor or debt management company, one possibility I can suggest is a debt management plan. A debt management plan or DMP works like this:

• You choose which debts to enroll in the program.
• Make one payment into your debt management plan each month.
• This payment is distributed among your creditors according to the terms of the plan.

Debt management plans are similar to debt consolidation in that you only have one payment to make. But this type of debt reduction program doesn’t require you to take out a loan or open a balance transfer credit card. And depending on the program, you may be able to lower your interest rate or waive certain fees.

Under a debt management plan, while you may receive more favorable interest rates or fee waivers, you’ll still pay back the entire principal amount owed.

4. Settlement of debts

Debt settlement is considered an option of last resort. It allows you to pay off debt for less than what is owed. If your creditor agrees to a debt settlement, any remaining balance is written off.

This is effectively a type of debt forgiveness because you don’t have to repay anything more than the agreed amount. Debt settlement is something you can do yourself if you have the cash to pay your creditors and are comfortable negotiating with them one-on-one.

There are also debt relief companies that will negotiate for you. However, this usually involves paying a fee to the company that helps you get loan forgiveness or credit card debt relief.

Also, keep in mind that you usually have to be in arrears before a creditor will consider paying off a debt. So compared to other debt relief options, debt settlement can be more damaging to your credit score.

For example, if you work with a debt settlement company, they will require you to make payments into a separate account they set up instead of paying individual creditors. This will cause you to be in arrears with lenders for a period of time, which will adversely affect your credit.

There can also be income tax implications for debt settlement – whether done through a debt settlement company or on your own – as the amount of debt that is forgiven will likely be considered taxable income.