For a country that collectively owes over $1 trillion in credit card debt, there must be a sustainable option to lessen the stress of carrying large debts month over month, year over year. Credit card debt relief is a way to not only get out of seemingly endless debt but also to perhaps bring about a little bit of mental—and ultimately, financial—peace.
Rather than just assuming you can entirely write your debt off with little impact otherwise, it’s important to know the various credit card debt relief options that are available and the different impacts each approach will have on your credit and financial health over the long-term.
What is Credit Card Debt Relief?
Credit card debt relief is a blanket term for the several ways to potentially get out of credit card debt. Options include taking a do-it-yourself approach to tackle debt, using a dedicated credit debt relief program, negotiating with credit card companies to pay a lesser sum, or at the most extreme—declaring bankruptcy for a potentially clean slate. Essentially, credit card debt relief means finding an option that minimizes hardship around traditional debt repayment.
How to Pursue Credit Card Debt Relief
Seeking credit card debt relief can be an ideal option for those experiencing hardship from life’s unexpected happenings, whether medical bills, a sudden loss of income, or for debt that has become excessively difficult to manage. Before deciding on a course of action, it’s important to know the differences between each approach.
Credit card debt relief may be able to be reached through a resolute commitment to aggressively paying down debts as quickly as possible. Do-it-yourself options to credit card debt relief require discipline and may not offer the degree of immediate debt relief desired.
If you have a particularly good credit score, you may be able to negotiate a lower interest rate on your cards through individual credit card companies to lessen the burden of debt. While you’re not necessarily entitled to a lower interest rate, explaining your hardship and mentioning the length of time you’ve been with the credit card company could help secure a better deal, making debt repayment more manageable.
You might also consider taking a new approach to paying down debt, perhaps by taking the debt snowball approach — paying off the credit card with the smallest interest rate first while making minimum payments on other debts. Or maybe you go for the debt avalanche method, which allows for an accelerated debt repayment as you put extra money towards the debt with the highest interest rate, while paying the minimum on all other outstanding debts. The snowball method costs more but can boost confidence in being able to fully tackle paying off one card before moving onto the next.
Credit card consolidation, while not a method that outright eliminates debt, can be a strategy to help you pay down debt faster. Consolidating debt means combining all outstanding debts you owe to different lenders into a new loan. With this option, you’ll only be making one payment a month instead of several— potentially making it easier to keep track of what you owe. By taking out a low interest rate loan through a lending institution, you may be able to pay off the majority, if not all, of your high interest credit card debt.
Another option for consolidation is to do a balance transfer from a high interest credit card to a credit card with a lower or no interest rate to lessen the burden of interest charges. It’s important to note that this option may come with a fee and doesn’t simply get rid of debt, but it could make the credit card debt relatively easier to pay down.
Seeking credit counseling, which is usually a free service provided through nonprofit organizations and independent financial agencies, may help lead you in the right direction to achieve credit card debt relief.
Trained counselors can guide you through repayment planning by reviewing your budget, analyzing your debt, and offering recommendations to help find a sustainable debt relief solution. Counselors simply offer suggestions, making the service free unless you opt to use their help in pursuing a course of action, such as enrolling in a debt management program.
Debt Management Program
If you decide to sign up for a debt management program (DMP) through a credit counseling agency, you’ll make a single monthly payment to the agency, and the agency will in turn pay your creditors. With this option, you’ll likely be able to pay off your debts within three to five years, as outlined in your specific debt management plan.
By enrolling in a debt management plan, you won’t be able to obtain new credit until your debts are paid off. In fact, the credit counseling agency will close your active credit accounts while you complete the plan. Closing your credit card accounts could negatively impact your credit score in the short-term, but by making regular monthly payments (that you can actually afford), debt management programs may help you find credit card debt relief over time.
Debt settlement means negotiating with your creditors to pay less on your debt than the amount you actually owe. This agreement is typically arranged by a third-party—a debt settlement company—that acts as an intermediary between you and your credit card companies.
In this scenario, you cease making payments directly to the credit card companies and instead pay the debt settlement company, that in turn offers a lump sum payment to appease the creditors. This avenue is typically a poor choice for credit card debt relief because as you stop making payments to your creditors, your credit score will not only deteriorate, but credit card companies can also come after you with penalty fees and even legal action for failing to make payments. There could also be tax implications if a large amount of debt is forgiven, because the IRS may consider cancelled or forgiven debt as taxable income.
Bankruptcy should be reserved as a last resort in extreme cases of credit card debt hardship, as it has serious implications on your credit score. The two most common types of bankruptcy are Chapter 7, which forgives your debts on the condition that you liquidate some of your assets to pay creditors, and Chapter 13, in which you enter into a court-arranged debt repayment plan that lasts three to five years, after which your debts are dismissed.
Chapter 7 bankruptcy is the only true way to avoid paying your debts, as it essentially wipes out outstanding debt entirely and offers a clean slate. Creditors still receive some means of repayment, whether in assets or through the repayment plan, and bankruptcy can offer a way out of otherwise inescapable debt.
Effects of Credit Debt Relief on Your Credit
Depending on which approach you pursue to achieve credit card debt relief, effects on your credit could range from nonexistent to severe damage. Since credit utilization (the amount of outstanding balances you have compared to your credit limit) makes up 30 percent of your credit score, carrying high credit card debt month after month is likely to have a damaging effect on your score.
The self-managed approach to reducing debt may not necessarily hurt your credit, so long as you continue to make regular payments. Credit card consolidation may help you tackle debt faster, possibly leading to a better score in the long run. Credit counseling won’t have a direct impact on your credit unless you decide to act on the advice given, such as signing up for a debt management plan. Depending on the parameters of the specific debt management program you sign up for, DMPs could have either a positive or negative effect on your credit.
On the more extreme end, opting for debt settlement through a third-party has the potential to hurt your credit when you stop making regular payments to credit card companies. Similarly, filing for bankruptcy could critically weaken your creditworthiness and should only be a last resort option, as a Chapter 7 filing stays on your credit report for ten years, while a Chapter 13 will remain for seven years.
The Bottom Line
The best approach to credit card debt relief depends entirely on the individual level of hardship you have in paying back credit card debts. It’s essential to consider the different options to reducing the strain of credit card debt that will work for your lifestyle. Whether you opt to take the do-it-yourself route or find yourself filing for bankruptcy, taking a committed approach to minimizing your debt could lend itself to better financial health in the long run.