Credit card debt relief options

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

With inflation and interest rates on the rise, it’s no surprise that so many Americans are turning to credit cards for support. Credit card debt in the United States is now at $986 billion, causing many people to feel overwhelmed with debt.

Thankfully, there are credit card debt relief options available to alleviate your financial burdens and make strides toward becoming financially stable. Credit card debt relief programs vary and are personalized to your situation. However, some of the options carry risks.

In this guide, we’ll go through everything you need to know about credit card debt relief, the steps to take and the risk associated with getting out of debt.

Key takeaways:

• Credit card debt relief can help you pay off a balance you owe.
• Credit repair counselors can help you manage your debt, create a budget and provide available resources.
• The five types of credit card debt relief are credit card balance transfer, personal loans, debt consolidation, debt reduction plans and bankruptcy.
• Credit card debt relief can affect your credit based on the type of relief you choose and your debt balance.
• It could take several years to repair your credit depending on the amount and type of debt.
• Credit card debt relief comes with risk, including scams, hidden fees, owing taxes and ending up with even more debt.

Table of contents:

• What is credit card debt relief?
• How do I know if I need credit card debt relief?
• How to get out of debt
• Types of credit card debt relief
• How to navigate credit card debt relief
• Credit card debt relief risks
• Does credit card debt relief affect my credit?

What is credit card debt relief?

Credit card debt relief is assistance with paying off a balance you owe. While debt relief doesn’t erase your debt, it does help adjust the repayment terms. Some credit card debt relief options include working with your creditor to grant lower interest rates, creating a payment schedule that lowers your monthly payments and pursuing debt consolidation.

Credit card debt relief vs. debt forgiveness

Credit card debt relief involves taking steps to make debt and repayment manageable. Credit card debt forgiveness is when some or all of the outstanding balance of a loan or line of credit is forgiven and doesn’t need to be paid back. However, credit card debt forgiveness is not a silver bullet that erases all your debt, nor does it come free of potential risks, but the two strategies can work together.

For example:

• 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, which means $5,000 of her debt has been forgiven.
• By paying back the rest in installments, she’ll relieve her debt, and her credit should improve over time, all things being equal.

Keep in mind that not all creditors forgive or settle debts, and it could negatively affect your credit. You may also have to pay taxes on the forgiven debt.

How do I know if I need credit card 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 collection 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 collection agency. If you’re at this point, getting help negotiating with debt collectors can be a huge relief.

How to get out of debt

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’d expect.

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

1. 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.
2. Research all your options based on the consultation: Ask the counselor for trustworthy educational resources, and take time to look into the options the credit counselor gives you. 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.
3. 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 with relieving credit card debt as you make consistent progress.

Types of credit card debt relief

There are several options when it comes to credit card relief. In general, it takes three to five years to see major improvements in your credit through debt relief programs, but putting in the time and effort now can help you in the long run. Here are the common types of credit card debt relief.

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.

Keep in mind that 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 3 percent of the balance amount. If you have a good credit score, this fee might be waived.

Pros of balance transfer	Cons of a balance transfer
Can provide a much lower interest rate, making your payments more manageable	Might require a good or excellent credit score
Usually a convenient process	If you don’t have a good credit score, the fee to transfer might be expensive
Combines many payments into one if you transfer multiple balances	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. The two types of personal loans are secured and unsecured. 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 of personal loans	Cons of personal loans
Quick access to funds (up to thousands of dollars)	High interest rates
Can be used to pay off credit card debt immediately	Fees
Can be easy to get even with a low credit score (especially secured personal loans)	Could put your assets at risk (with a secured loan)
Flexible repayment terms	Could damage your credit if you don’t pay back the loan on time

3. Debt consolidation

Debt consolidation is where you combine debt from several credit cards into a new loan with 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 may 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 ratio, which can help your credit.

Pros of debt consolidation	Cons of debt consolidation
Lower interest rate	May not help your credit significantly long term
Many options and lenders available	You may not be eligible if you have a low credit score
Combines payments into one easy payment	Secured consolidation loans put your assets at risk, including your home or car
Mental relief from many payments	–
Doesn’t usually have a major negative impact on your credit	–

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.

A counselor can also help you figure out where you can scale back and how you might be able to make extra cash for payments. Debt relief counselors are available to help negotiate your outstanding balance and provide tips on how to repair your credit.

Pros of debt reduction plans	Cons of debt reduction plans
Help you get out of debt with the least amount of stress	Difficult to do without a credit counselor
Help you negotiate low interest rates	Can take time to reduce your debt
Is personalized to your financial situation	Might have an initial negative hit on your credit score
Initial consultations are usually free	–

5. Bankruptcy

If you find yourself deep in debt, filing for bankruptcy might 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.

Bankruptcy is not something to take lightly, as declaring bankruptcy affects your credit report for up to 10 years.

• Chapter 7 bankruptcy: 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 seven years.

Pros of filing for bankruptcy	Cons of filing for bankruptcy
Gives you a fresh start	Damages your credit score for up to 10 years
Bankruptcy lawyers will guide you through the process	Recovery is slow
Your lawyer handles the calls and letters from collection agencies	A bankruptcy lawyer can be expensive
Your personal assets like your home and retirement savings are exempt from creditors	Not all debts may be eliminated (e.g., your student loan or alimony payments won’t go away)
You can rebuild your credit after bankruptcy is off your record	–

How 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.
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 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 significantly, 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, think carefully before closing your cards. If you have several kinds of credit, closing any of your cards may increase your overall credit utilization. Plus, it would shorten the length of your credit history. Both result in a hit to your credit.

Credit card debt relief risks

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 up front, 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: Debt relief can affect your credit temporarily, but as you pay more of your debt balance, your credit should recover.
• 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 behaviors 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.

Does credit card debt relief affect my credit?

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

A turnaround on your credit won’t happen overnight. It could take anywhere from a year to a few years, depending on the amount and type of debt. Some credit card debt relief options may lower your credit initially, but a hit to your credit at first could be worth it for the future. 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. For example, declaring bankruptcy causes you credit to take a major hit and takes a long time to recover from.

How to get your finances back on track

If your financial situation could benefit from a debt relief program, you can make huge strides. Your credit 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 debt relief plan might impact your credit. A credit repair company could help you determine if other methods could improve your credit 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.

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