Credit Card Debt Relief: Everything You Need to Know

When you’re buried in credit card debt, it can be stressful to make payments every month and may still feel like you’re falling behind. In 2019, credit card debt in the United States totaled over $1 trillion, so you’re definitely not alone. Unexpected bills, high-interest rates or a layoff can make spiraling into debt unavoidable. 

Debt relief can help alleviate your financial burdens and make strides toward becoming financially stable. Credit card debt relief programs vary and are personalized to your situation. Some of them carry risks, so review your options and the fine print closely before proceeding. 

To determine if debt relief is right for you, take a close look at your financial situation. If debt relief can ease your financial stress and raise your credit in the long run, it can put you on the path to improved finances and overall well-being.

Table of Contents

  • What is Credit Card Debt Relief?
    • Credit Card Debt Relief vs. Credit Card Debt Forgiveness
  • How Do I Know If I Need Debt Relief?
  • Options for Relief
    • Credit Card Balance Transfer
    • Personal Loan
    • Debt Consolidation
    • Debt Reduction Plan
    • Bankruptcy
  • Tips to Successfully Manage Credit Card Debt Relief
  • What to Look Out For
  • How Does Credit Card Debt Relief Program Affect My Credit?

What Is Credit Card Debt Relief?

Credit card debt relief eases the burden of debt through a specific plan, and there are several options to choose from. While debt relief doesn’t erase debt, nor the potential consequences to credit, it can help with repaying your debt or adjusting the repayment terms.

Credit Card debt relief helps with repaying your debt Image

When budgeting and scaling back on expenses isn’t enough, a debt relief program can be beneficial. Ideally, you’ll work with a credit counselor to form a plan that works best for your situation. 

Some relief options include: working with your creditor to grant lower interest rates; a payment schedule that lowers your monthly payments; or debt consolidation.

Credit Card Debt Relief vs. Credit Card Debt Forgiveness

The terms ”credit card debt relief” and ”credit card debt forgiveness” mean two different things. 

Credit card debt relief involves taking steps to make debt and repayment manageable. 

Credit card debt forgiveness is when your creditor agrees to accept an amount that’s less than what you owe. Credit card debt forgiveness is not a silver bullet that eradicates all your debt, nor does it come free of potential risks. The two strategies can work together, though.

Example of Pursuing Both Relief and Forgiveness

Danielle owes $20,000 on her credit card, and she hasn’t made a payment in over five months. She reaches an agreement with her credit card company to pay $12,000 in installments if she pays a lump sum of $3,000 now. That means $5,000 of her debt has been forgiven.

By paying back the rest in installments, she’ll relieve her debt, and her credit score will improve over time. Not all creditors forgive or settle debts, and it could negatively affect your credit score (at least for a time). You may also have to pay taxes on the forgiven debt. Still, there are several options for credit card debt relief, and forgiveness is only one of them.

How Do I Know If I Need Credit Debt Relief?

To determine if you need credit card debt relief, you should evaluate your specific financial situation. Keep in mind that if your debt can be repaid by making small changes in the way you spend, that’s always the best route. But if you’re budgeting meticulously and barely staying afloat (or you’re sinking), you may need to seek help. 

Here’s how to know if you’re a candidate for debt relief assistance:

  • Your total unsecured debt is half or more of your gross annual income: If you add up your debt across your credit cards, personal loans and medical bills, and the total is more than half of your annual gross income, debt relief might help you get back on track. 
  • It’s a struggle to repay your unsecured debts, even when you budget like a champ: If you’ve cut your spending to the bone and still cannot make your debt repayments, continuing to struggle is often a slower, insufficient way to improve your finances and get back on your feet. 

Multiple creditors have sold your debt to collections agencies: Debt collectors can be ruthless and difficult to work with. Sometimes setbacks and unexpected bills happen and some of your debt may have reached a collections agency. If you’re at the point, getting help to negotiate with debt collectors can be a huge relief.

Three Steps to Finding the Best Debt Relief Plan Image

If you’re buried in debt, but don’t know where to go, take the following steps. You might be able to get relief sooner than you expect.

Steps to Find the Best Debt Relief Strategy

Here are the following steps you should consider after evaluating your situation:

  • Speak to a credit counselor: Allow someone who is familiar with debt relief options to help guide you to an individualized plan. 

A reputable credit counseling organization will discuss your financial outlook with you. They’ll make recommendations on managing your debt and budgeting, plus share available resources. 

  • Research all your options based on the consultation: Ask the counselor for trustworthy educational resources, and take time to look into the options given by the credit counselor. Make yourself familiar with them and weigh the pros and cons. 

Be sure to know the concrete steps of each option and how they’ll impact your unique situation.

  • Select a route that works best for your situation: Once you’ve reviewed debt relief options—and perhaps had a follow-up credit counseling session—make a decision and move forward. 

Select the route you want to take, then formulate a concrete plan. This will help you make consistent progress in overcoming your debt. 

5 Options for Credit Card Debt Relief (and the Pros and Cons of Each)

There are several options when it comes to credit card relief. Remember that no matter which option you choose, credit card relief takes time. In general, it takes three to five years to see huge increases in your credit score through debt relief programs, but putting in the time and effort now can help with long-term gains. 

Here are common credit card relief options along with their pros and cons.

1. Credit Card Balance Transfer

If you have high-interest debt on a credit card, you can transfer the balance to a different card with a lower interest rate. By paying less in interest, more of your payments will go toward the principal balance, allowing you to pay off your debt faster.

When making a balance transfer, check to see if the new card offers a low introductory interest rate. An introductory interest rate, which could be as low as zero percent, usually lasts for a certain period of time, such as six to 18 months.

Ideal Balance Transfer Traits Image

Any late or insufficient payments can invalidate these lower interest rates. If you think you can pay off a good part of your debt within that time, a transfer might be a wise choice. A fee for transferring a balance is common—usually about three percent of the balance amount. If you have a good credit score, this fee might be waived.

Pros

  • Can provide a much lower interest rate, making your payments more manageable
  • Usually a convenient process
  • Simplifies many payments into one if you transfer multiple balances

Cons

  • Might require a good or excellent credit score
  • If you don’t have a good credit score, the fee to transfer might be expensive
  • Once introductory interest rates are over, the interest rates could be higher 
  • New purchases won’t be interest-free like the balance transfer
  • Can be complicated to put your payments toward your balance transfer vs. new purchases

2. Personal Loan

Personal loans give you access to funds that can be put toward your credit card debt. There are two types: Secured and unsecured personal loans. Secured loans require collateral, such as a vehicle. In case you don’t make repayments, they can seize your property. Unsecured loans only need a signature, but usually require a higher credit score than secured loans.

Personal loans can have high-interest rates but are often fixed for the life of the loan, meaning they won’t increase. A lender might give you months or years to pay off a personal loan depending on the contract you sign.

Pros

  • Quick access to funds (up to thousands of dollars)
  • Can be used to pay off credit card debt immediately
  • Can be easy to get even with a low credit score (especially secured personal loans)
  • Flexible repayment terms 

Cons

  • Often high-interest rates
  • Can get hit with fees
  • Could put your assets at risk (with a secured loan)
  • Could damage your credit if you don’t pay back the loan on time

3. Debt Consolidation

Combining debt from several credit cards into a consolidation loan can give you a fixed rate and a single monthly payment. Consolidation loans usually offer lower interest rates than credit cards, so you can pay off debt faster and pay less overall.

While the lower rates are helpful, certain loans can be viewed as a risk factor by lenders and credit scoring models like FICO®. But removing your debt from your credit cards results in a lower credit utilization, which can help increase your credit score. 

Pros

  • Can give you a lower interest rate
  • Many options and lenders available
  • Combines payments into one easy payment
  • Can give you mental relief from many payments
  • Doesn’t usually have a huge negative impact on your credit

Cons

  • May not help your credit significantly long-term
  • You may not be eligible if you have a low credit score
  • Secured consolidation loans put your assets at risk, like your home or car
Debt Consolidation Image

4. Debt Reduction Plan

A debt reduction plan helps you manage your debts, often through lower monthly payments. A debt relief counselor works to determine the exact method like a repayment plan or debt consolidation.

You may also create a personal budget for paying off debt. A counselor can help you figure out where you can scale back and how you might be able to make extra cash for payments. A debt relief counselor can also negotiate lower interest rates and give you guidance on how to repair your credit.

Pros

  • Can help you get out of debt with the least amount of stress
  • Can help you negotiate low-interest rates
  • Is personalized to you and your financial situation
  • Allows you to take control of your finances
  • Initial consultations are usually free

Cons

  • Difficult to do without a credit counselor
  • Can take time to reduce your debt
  • Might have an initial negative hit on your credit score

5. Bankruptcy

If you find yourself deep in debt, sometimes declaring bankruptcy may sometimes be the best option for you. While it can be detrimental to your credit in the short-term, filing a Chapter 7 or Chapter 13 bankruptcy might put you ahead in the long run.

However, you should consult with an attorney in detail to fully explore this option and understand how bankruptcy will affect you.

Chapter 7 Bankruptcy & Chapter 13 Bankruptcy Image

Bankruptcy is not something to take lightly, as declaring bankruptcy affects your credit report for up to 10 years. Here’s what to expect with both types mentioned.

Chapter 7 bankruptcies: Your debt is mostly wiped out by selling your assets, and it stays on your report for up to 10 years.

Chapter 13 bankruptcy: Recovering is typically easier since you pay back some or all of your debts, and it falls off your credit report after 7 years.

Pros

  • Gives you a fresh start 
  • Bankruptcy lawyers will guide you through the process 
  • Your lawyer handles the calls and letters from collections agencies
  • Your personal assets like your home and retirement savings are exempt from creditors
  • You can rebuild your credit after bankruptcy is off your record

Cons

  • Ruins your credit score for up to 10 years
  • Recovery is slow
  • A bankruptcy lawyer can be expensive
  • Not all debts may be eliminated (i.e., your student loan or alimony payments won’t go away)

Tips to Navigate Credit Card Debt Relief

Depending on how you’re handling your credit card debt relief, you’ll be making one or several monthly payments to creditors. If you miss a payment, paying off your debt will take longer and be more expensive. \

Here’s how to better manage your credit card debt while paying it back:

  1. Scrutinize your spending: Take a hard look at your lifestyle and how you’re spending your money. Once you’ve got a handle on where your money goes, decide where you can cut expenses and allocate your savings to your cards.
  2. Create a budget: Design a budget on a spreadsheet or in an app. Budgeting apps can send you payment reminders and alert you if you’re spending too much. Some apps even track your credit score.
  3. Reduce your debt as much as possible: Credit card debt can take a long time to pay off. To see a difference, repay some of the balance every month, not just a minimum payment (if possible).
  4. Lower your interest payments: If your credit score is solid, consider transferring your current credit card balances onto a new card with zero interest on balance transfers—and no transfer fee.
    It’ll be easier to start reducing your debt without the large interest payments.
  5. Consolidate your debt: An effective way of getting your debt under control is to combine it into one monthly amount. Shop around for a good deal, pay off your existing agreements, and you’ll be left with a single, more manageable sum. 
  6. Don’t borrow against your mortgage: It may be tempting to borrow against your house to settle your credit card debt, but this should be a last resort. Using your mortgage to pay credit card debt makes the debt last longer.
    For instance, you’ll be paying it back over 20 years instead of only a few years on something like an unsecured loan. In general, you’ll end up paying a lot more interest in the long run.
  7. Don’t skip secured loan payments: While paying back your credit card debt is important, you should prioritize any secured loans first so that you don’t risk losing your house, car or other assets. 
  8. Don’t use retirement money: It can be costly to pay off your credit cards with your retirement fund. Leaving the money where it is, allows it to accrue much more interest in the long-term than you’ll save by using it to pay off your credit cards. 
    You’ll also be liable for fees for withdrawing the money early, and, as the withdrawal will be considered income, you’ll be taxed as well.  
  9. Don’t feel pressured by creditors: Creditors and collection agencies can be persistent. Make sure you’re not pressured into paying more than you can afford. Remember that harassment is an offense and you can report it.
    If possible, negotiate with your creditors by letter or email rather than on the telephone.
  10. Bankruptcy should be a last resort: Declaring yourself bankrupt seriously impacts your creditworthiness in several ways. It will reduce your credit score by as much as 200 points, and a record of it will remain on your credit report for up to 10 years. You run the risk of losing assets, and you’ll find it hard to get credit in the future. 
  11. Keep your credit cards open: Once you’ve paid off your credit card debt, you should think carefully before closing your cards. If you have several kinds of credit, closing your cards increases your overall credit utilization. Plus, it shortens the length of your credit history. Both result in your credit score taking a hit.
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The Risks Involved with Debt Relief

Debt relief takes several forms, but any method can be tricky. Whichever approach you choose, there are several ways you can be misled or scammed. Here’s what to watch for: 

  • Fake companies and scams: Fake companies ask for hefty fees upfront, then fail to contact your creditors or provide you with the loan you applied for. If you’re suspicious about a company, contact the Federal Trade Commission.
  • The deal doesn’t save you money: If the length of the loan is so extended that it costs more to pay it off than to keep original agreements in place, that’s a red flag. 
  • Hidden fees and costs:  Make sure you’re aware of all the fees and hidden costs before committing to any agreement.
  • Impacts on your credit score: Debt relief can seriously affect your credit history. 
  • Owing taxes: Debt relief is a double-edged sword. While there are a few exceptions to the rule, in general, forgiven or canceled debt is taxable. 
  • Ending up with more debt: Debt relief methods don’t address the behavior that led to the debt in the first place. If you take out a debt consolidation loan or credit card, you’re still accruing more debt, and it can be tempting to start using credit again.
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How Does Credit Card Debt Relief Program Affect My Credit?

Credit card debt relief programs affect your credit based on the type of debt relief you choose and how much debt you have. In general, you can expect a dip in your credit score at first, followed by a steady rise over time.

Expect an initial drop in your score Image

A turnaround on your credit score won’t happen overnight. It could take anywhere from a year to a few years, depending on the amount and type of debt you have. Some debt relief options might lower your score drastically to begin with, but a hit to your credit at first could be worth it in the long run. With each passing month, you’ll get more and more back on your feet.

Evaluate the type of debt relief you’re considering to understand how it might affect your credit. Declaring bankruptcy, for example, causes a major hit to your credit and requires significant time to improve it.

A Debt Relief Plan Can Get You Back On Track, But Proceed with Caution

If your financial situation could benefit from a debt relief program, you can make huge strides. Your score won’t skyrocket overnight, but with diligence, you can be freer and more stable over time. Be sure to review the terms and conditions beforehand, and understand how the plan might impact your credit score.

A credit repair consultation can help determine if other methods can improve your creditworthiness without having to sign up for debt relief. By taking the time to figure out a plan now, you’ll have relief sooner—giving you peace of mind and better financial stability.