Last Updated on November 21, 2020
If you’ve maxed out your credit cards and are borrowing deeper, chances are you are feeling overwhelmed. How are you ever going to pay down the debt? This page contains every information you need to get out of debt as quickly as possible to avoid going bankrupt.
Table of Contents
Understanding Credit Card Debt Relief
Credit card relief refers to debt relief or forgiveness of credit card debt that offers partial or total cancellation of high credit card balances and interest rates, or the slowing or stopping of credit card debt growth.
Let’s say you have $ 15,000 in credit card debt. A credit card settlement plan can help you settle $ 15,000 in credit card debt, for $ 10,000, including all interest and fees. What happened to the other $ 5,000 and all the interest? The remaining balance would be canceled or forgiven.
Basically, you should turn to credit card debt relief programs if do-it-yourself repayment options don’t work. If you have tried to reduce debt on your own, transferring balances and consolidating with a loan, but none of this worked, it’s time to let the professionals handle your case.
Credit Card Debt Relief Programs
There are two basic programs that offer credit card debt relief: Debt management programs and debt settlement programs
Debt Management Programs
Debt management programs are a form of debt consolidation support. These are carefully constructed payment structures that combine credit card payments into one affordable monthly payment. But, unlike other types of consolidation, you do not receive new financing. In other words, you are not opening a new credit card or taking out a loan. This is how it works:
- A consumer credit counseling agency helps you set up a repayment plan that fits your budget.
- Then they negotiate with your creditors to reduce or eliminate interest charges and stop penalty fees.
- Once your creditors agree to receive payments through the program, your program starts.
- You make one payment to the credit counseling agency each month.
- Then they distribute the money to your creditors as agreed.
Unlike other types of consolidation, you still owe your original creditors. You are only paying them back in a more efficient and profitable way. By reducing or eliminating interest charges and fees, you can get out of debt faster even if you pay less each month. And since you pay back everything you’ve charged, this relief program won’t affect your credit score. In fact, many credit users who complete the program see their scores improve.
Debt Settlement Programs
Debt settlement is a service offered by third-party companies that may try to reduce your debt by negotiating with your creditors or debt collectors. Unlike debt management, debt settlement programs will hurt your credit score, but they can get you out of debt faster for less money. By paying off a debt, you pay each creditor only a fraction of your debt. They pay the remaining amount and report the settlement to the credit bureaus – hence the hit to your score. This is how it works:
- You set up a monthly set aside account with a debt settlement company.
- Each month, you put money into the account to generate the funds you need for a settlement.
- Once you have enough funds, the settlement company reaches out to your creditors to negotiate settlements.
- They get each creditor to agree to accept a percentage of what you owe in exchange for discharge of the remaining balance.
- Once your creditors agree to the settlement amount, the funds are taken out of your set aside account.
- Then the creditor closes the account and discharges the remaining balance.
In order to free up money for the monthly set aside, settlement companies often advise you to stop payments. The idea is that you will damage your credit as a result of the settlement anyway, so there is no point in continuing to make payments. This allows you to quickly earn the money you need.
When considering debt settlement programs, “It’s important to do your research to avoid debt relief scams,” says Leslie Tayne, founder and head attorney at Tayne Law Group, which specializes in debt relief. “If you’re looking to get rid of the burden of debt, the last thing you want to be dealing with is a scam from a company that promises to help.”
Comparing Credit Card Debt Relief Programs
| Debt Management Program | Debt Settlement Program |
| Pays back everything you charged. | Pays back a percentage of what you owe. |
| Reduces or eliminates interest charges, stops penalty fees. | Interest charges and fees are not a factor when you settle. |
| Saves your credit and may improve your credit score by helping you eliminate debt and build a positive credit history. | Settlements appear as a negative item in your credit report for seven years from the date the account originally became delinquent; these items can decrease your credit score. |
| Best used when most of your debts are still with the original creditors. | Best used if most of your debts are charged-off and in collections. |
| Takes 36-60 payments to complete. | Takes 12-48 months to complete. |
| Reduces total credit card payments by up to 30-50%. | The average settlement comes out to about 48% of what you owed. |
| Fees range from $0-$79 and vary by state; the average person pays about $35 per month. | Fees vary by state and don’t apply until your debt is settled; fees generally equal out to about 10-25% of the debt enrolled. |
How to Find the Best Credit Card Debt Relief
Finding debt relief means you identify a solution that minimizes the burden of debt repayment. The goal is to reduce or eliminate interest charges and fees so that you can pay off your debt faster. So how do you know which solution is right for you? The answer lies in consumer credit counseling.
Credit counseling is not a debt solution in and of itself. It’s an easy, free way to find the debt solution you need. A certified credit counselor evaluates your debts, credit and budget to see where you stand so they can help you find the right solution for your needs.
Credit counseling simplifies your repayment process, ideally making it easier to pay off your debt. In some cases, credit counselors can negotiate lowered interest rates, reduced monthly payments and more with your creditors, which could save you money.
The credit counselor’s job is to arm you with all the information you need to make an informed decision. It’s important to find a good credit counsellor who has your best interests at heart. In general, steer clear of for-profit credit counseling agencies. Nonprofit agencies are more likely to charge lower fees and provide unbiased advice.
The first step is to make sure the credit counseling agency is certified. You can find these agencies through any of the following:
- The National Foundation for Credit Counseling
- The Financial Counseling Association of America
- The U.S. Trustee Program
- Your state’s attorney general’s office
- Your local consumer protection agency
Once you find a credit counselor, set up a meeting to talk about your situation and ask for advice. A good credit counselor will analyze your full financial picture before making any recommendations.
Because credit counseling can have an impact on your credit, it’s important to check your score regularly to understand how certain actions impact it and determine what you can do to improve it.
Also, consider checking your credit report before and during the credit counseling process. This can help you pinpoint areas you need to address, and can also help you identify potentially incorrect or fraudulent information on your reports. If you find something, you can dispute it with the credit reporting agencies to have it corrected or removed. Depending on the situation, this could help your credit score.
How Debt Relief Options Affect Your Credit?
Debt relief can be good and bad for your credit it all depends on which method you choose and how far behind you let your debt fall. Ultimately, if you miss payments and let accounts fall past due, your credit score is going to suffer. It’s possible to have a lot of debt at one time and still have a good credit score, but the trick is to make sure you manage your repayment responsibly to keep your credit health in check. Here are a few ways each of the major debt relief options can affect your credit:
Debt settlement is one of the more dangerous debt relief options when it comes to harming your credit score. Debt settlement companies typically ask customers to discontinue payment to creditors while they negotiate on your behalf. Payment history is the most important factor in your credit scores, and if you miss any debt payments, your credit score will take a dip. Debt settlement companies are not chiefly concerned with your credit scores; they focus on lowering or eliminating what you owe.
Be cautious when working with a debt settlement company and make sure to work with a reputable firm. You can check with your local consumer protection agency or state attorney general to find out if the company has had any complaints filed against it in the past. Also consider the full effect missing payments could have on your credit history and the tax implications that come with settling debt. Debt settlement should be one of your last options, only after you’ve tried remedying your debt with less harmful tactics, like debt management or consolidation, or one of the alternative methods mentioned below.
Debt management is a great option for someone looking to relieve their debt woes without hurting their credit score. With this method of debt relief, your credit counselor works with your creditors to create a repayment plan that will work for you and then you stick to it. As long as your repayment goes as planned meaning you don’t miss any payments your credit score should remain unharmed. Refer to the list of credit counselors approved by the U.S. Justice Department when looking for a counselor in your area.
How to Avoid Credit Card Debt?
Credit cards can offer convenience and rewards, among other benefits, but also come with certain risks. A credit card allows you to spend money that you may not have on hand at the time, which creates debt. And while you may want to use a credit card to pay for some small items in the short term, you should avoid incurring large debts that can take a long time to pay off.
To avoid debt, it’s important to only spend within your means and avoid utilizing the majority of your available credit. It’s also critical to pay off as much of your outstanding balance as possible each month and not just make the required minimum payment.
The ideal way of using your credit card is to responsibly charge and then pay off your balance. To do this, make a few purchases each month and pay your bill in full and on time. By not carrying a balance, you not only avoid paying interest on purchases, but are using a time-tested strategy for building credit.
Paying off debt when you’re overwhelmed may seem impossible, but with the right strategy and determination to get back on a solid financial footing, it can be within your reach.