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There are plenty of ways that you can try to solve credit card debt problems on your own. But if you’ve exhausted all the do-it-yourself options and you still can’t pay it off, then you need professional help. Credit card debt relief programs are designed to help you get out of debt as quickly as possible so you can stop throwing money away on payments that you go nowhere and avoid bankruptcy.
This page explains everything you need to know about different options for credit card debt relief. If you still have questions, head over to our Ask the Expert section to ask Debt.com’s panel of experts.
Credit card debt relief refers to any program that allows you to get out of debt without using new financing. There are several different programs that help you do this. Which one you use depends on:
Credit card debt relief programs are essentially where you should turn when do-it-yourself repayment options won’t work. If you’ve tried to reducing debt on your own, transferring your balances and consolidating with a loan, and none of it worked then it’s time to call in the professionals.
There are two basic programs that offer credit card debt relief:
There are many debt relief options and two popular solutions are debt management programs and debt settlement plans. A common misconception is that they are the same thing.
But they are actually two very different types of solutions.
A debt management program, or DMP as it is commonly referred to, is the relief option where you pay back your principal in-full but your interest rates are reduced or even eliminated.
You only have one payment to make each month, instead of several. And your credit score stays intact and may even improve while on the program.
The key to a successful debt management program is that more money goes to eliminating the principal while high interest rate charges end.
In comparison, with a debt settlement program, you don’t pay back everything you owe.
A debt settlement specialist negotiates with your creditors with the goal of getting them to sign off on a settlement offer, where they agree to reduce your principal so you only pay a portion of the original amount.
Once they agree to the debt settlement, the creditor receives their money from what you set aside in a ‘program savings account’.
After you complete a debt settlement program, you will enjoy freedom from debt but it may take a few months to a few years to rebuild your credit rating, depending upon your unique situation.
To find out which option is better for you, fill out our form or better yet, call us now. We’ll match you with the best solution for your situation, for free. We’re A-plus rated by the Better Business Bureau and have helped thousands of people become financially stable.
So, don’t struggle any longer, give us a call. When life happens, we’re here for you.
Debt management programs are a type of assisted debt consolidation. But unlike other types of consolidation, you don’t take out new financing. In other words, you don’t open a new credit card or take out a loan.
Here’s how it works:
Unlike other types of consolidation, you still owe your original creditors. You just repay them in a way that’s more efficient and cost-effective. By reducing or eliminating interest charges and fees, you can get out of debt faster even though you may pay less each month. And because you pay back everything you charged, this relief program won’t hurt your credit score. In fact, many credit users who complete the program actually see their scores improve.
By contrast, debt settlement programs will hurt your credit score, but they can get you out of debt faster for less money. With debt settlement, you only pay back a portion of what you owe to each creditor. They discharge the remaining balance and report the settlement to the credit bureaus – hence the hit to your score.
Here’s how it works:
In order to free up money for the monthly set aside, settlement companies often advise you to stop making payments. The idea is that you’re going to damage your credit with a settlement anyway, so there’s really no point in continuing to make payments. This allows you to generate the funds you need quickly.
|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.|
There are several ways that you can try and get out of debt on your own without professional assistance. Most of them involve taking out new financing, such as a debt consolidation loan or balance transfer credit card. But there are a few ways to seek debt relief without new financing that you can try on your own.
These options are highly similar to the two programs we describe above. The main difference is that you must negotiate with each creditor individually, instead of enrolling in a program that basically allows you to take care of everything at once.
A workout agreement or workout arrangement is a repayment plan that you set up with a creditor. The creditor will typically freeze your account, but in exchange, they reduce or eliminate interest charges. Then they help you set up a payment plan that you can afford.
To use this option, your account typically still needs to be with the original creditor. It’s best used when you’re a few payments behind, but they haven’t yet closed the account. This option is similar to a debt management program, except you set up a plan with each individual creditor. That can make workout agreements challenging to fit in your budget if you have more than one arrangement that you want to set up.
You can make settlement offers to creditors on your own without the help of a settlement company. You basically negotiate yourself to get the creditor or collector to accept a percentage of what you owe. Then they agree to discharge the remaining balance.
Bear in mind that you generally must have funds available to make a lump-sum payment. Creditors and collectors rarely set up partial payment plans, although it has been known to happen. But in most cases, you need a sum of money to make the settlement.
A settlement offer can go either way. You may reach out first and contact the creditor with your settlement offer. You generally want to write your offer in a formal letter. The other way individual settlements can happen is when the creditor or collector reaches out to you. They may call or send you a letter offering to discharge your balance for part of what you owe.
In this case, you can decide to accept the offer or make a counteroffer. During this negotiation, you can also negotiate a pay-for-delete if it’s a collection account or re-aging if the account is still with the original creditor.
Whether you want to repay your debts in full or settle for a portion of what you owe, the success of your strategy depends on your ability to negotiate effectively. Some creditors and even some collectors are flexible and willing to work with you. Others won’t be so easy. So, your results with do-it-yourself debt relief strategies can vary greatly.
Professional debt relief companies provide two big advantages:
Essentially, you aren’t the first person a debt relief company has helped. They’ve negotiated with the same creditors and collection agencies for other consumers. That gives them an “in” when it comes to negotiation. It also gives the creditor or collector some confidence that you’ll keep up your end of the bargain. They know you’re working with a company, so they’re often more willing to negotiate and work out a deal.
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If you still have a good credit score, there are two ways to find relief from credit card debt that both involve taking out new financing. You essentially take on a new debt that helps pay off your existing debts in a more efficient way. The key is to reduce or eliminate the APR applied to your total credit card balance.
A balance transfer credit card allows you to transfer balances from your existing accounts to a new card that offers low or no APR on balance transfers. These cards often offer a 0% APR introductory rate when you first open the account. That gives you 6-18 months to pay off the transferred balances interest-free. There is usually a fee for each transfer that ranges from $3 per transfer to 3% of the balance transferred.
This option works best if you have excellent credit and a limited amount of debt to repay – usually $5,000 or less. Any more than that and most people can’t afford to pay off the full balance before the teaser rate ends. If you don’t pay the balance in that time, you’ll be right back to a high interest rate on your credit card debt. You generally also need a good amount of cash flow available, so you can pay off your debt in large chunks. If you’re short on cash, this probably isn’t the option for you.
A debt consolidation loan is a personal loan that you take out for the purpose of consolidating debt. With good credit, you qualify for a low-interest rate loan and then you use the funds from the loan to pay off your credit card balances. This leaves only the loan to repay. Loans typically offer much lower rates than credit cards for the same credit score, plus you get the benefit of fixed payments
Debt consolidation loans usually only work up to a certain amount of debt. For most people, a loan is only a viable option if you owe $35,000 or less, depending on your budget. You also need good credit to qualify for the lowest APR possible. Some lenders may have other restrictions, such as requiring you to close your credit cards to secure the loan.
Not all credit card debt relief solutions are created equal! These bad ideas for debt relief put your finances on shaky ground and could make for a bumpy financial ride long-term.
Cashing out retirement savings and investments is a bad idea because you don't just drain the funds you take out. You also lose the growth you would have enjoyed on those funds until you put them back. So you take two steps back on saving for retirement anytime you tap your retirement accounts.
In addition, retirement funds like a 401(k) and traditional IRA have early withdrawal penalties. If you take money out before you turn age 59.5, then you'll face penalties on the funds you take out. What's more, you must pay taxes on the money withdrawn, since it counts as income. These penalties and extra taxes don't happen with a Roth IRA, but you'll still be losing out on savings growth.
Credit card debt is unsecured, meaning there's no collateral that secures the debt. Any option that taps home equity to get money, such as a home equity loan or cash-out refinance, is a secured debt. So, if you borrow against your home equity to pay off credit card debt, you effectively convert unsecured debt to secured. If you default on the new debt, you could lose your home.
In general, you want to protect your home's equity as much as possible. Borrowing against it is extremely risky, and it's usually not worth that added risk to pay off your credit cards. Even if you default on a credit card and it goes to collections, they can't take your home. In fact, the must sue you in civil court to force any kind of repayment. But once you take out an equity loan, your home is at risk of foreclosure if you fall behind with the payments!
If you have a life insurance policy that has cash value, then you can usually borrow against it. But just because you can, it doesn't mean that you should. If you take money out, you effectively take out a loan against your insurance policy. You make a new debt with a whole new set of problems.
If you don't pay the money back or die before it's paid off, then the insurer will take out the amount owed plus interest. In other words, your family will have less life insurance to help them live after you're gone. That money is there to provide your family with a financial safety net in case the worst happens. You don't want to do anything that will weaken that safety net.
Unless you don't mind losing a friend or making family gatherings extremely awkward, it's best to avoid borrowing money from people you know. Loans between family or friends are a fast way to ruin relationships, so it's best to keep your money and your relationships separate.
There’s a pretty common myth that the federal credit card debt relief government program that consumers can use to get out of debt. For the record, there’s not. There is no grant or any federally-sponsored repayment plan that you can use to pay off your credit cards. That being said, the federal government does oversee and regulate the debt relief industry. This is where some of the confusion about government debt relief programs comes from.
In 2010, the Federal Trade Commission stepped into regulating debt settlement companies. The main part of this legislation focused on creating what’s known as an advance-fee ban. This regulation prevents debt settlement companies from charging any fees up-front before they complete at least one settlement.
In the past, scammers would set up fake debt settlement companies, promising to help people get out of debt. They’d charged setup fees that would be as high as 25-40% of the debt enrolled in some cases. They’d take the money and then disappear, leaving the consumer out the fees without any settlements reached.
The Credit Card Debt Relief Act of 2010 prevents this scam. Settlement companies cannot charge fees upfront without at least a money-back guarantee. They can only apply fees once they settle a debt on your behalf.
There’s also a federal law passed in 2005 that governs the credit counseling and debt management service industry. Credit counseling agencies must register as a consumer debt management service in each state where they want to work. They must also provide full disclosures about their debt management plan, with a penalty-free three-day cancellation policy.
One possible source of the confusion regarding government grants for eliminating credit card debt may come from how not-for-profit credit counseling agencies operate. These nonprofit agencies qualify for 501(c)3 status, making them nonprofit organizations that exist to help consumers. This helps ensure that these companies always operate in consumers’ best interest, instead of in the interest of turning a profit.
In order to fund their operations, these companies get grants from credit card companies to provide financial education to consumers. Credit card companies basically pay companies that prove they exist to help their customers. This allows nonprofit credit counseling agencies to provide debt management services at a relatively low cost.
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And even after you find a payment that works for your budget, it won’t necessarily be easy to get out of debt. You’ll have to learn to live without credit cards since any accounts that you enroll in a DMP are frozen. Getting through the program will take careful budgeting and patience. But if you can stick with it, you’ll be out of debt without damaging your credit score for years to come.
But keep in mind that most debt consolidation loans have terms from 36-60 months as well. So, a DMP is often roughly equivalent to the amount of time it would take to get out of debt on your own.
It’s worth noting that just because you work with an accredited debt settlement company, results are not guaranteed in all cases. Some creditors or collectors may not be willing to negotiate, even with professional negotiators on your side. Still, a settlement company should be able to negotiate effective settlement agreements for you in most cases. But you should go into a settlement with the understanding that some creditors or collector may not be willing to budge.
The more money you have available to set aside to generate your settlement funds, the faster a DSP goes. This is why debt settlement companies often tell you to stop making any payments you’re still making. This maximizes the amount of money you have to set aside. But it can also mean that any accounts that you’re trying to keep up with would fall behind.
This is a tradeoff that you need to weigh carefully before you enroll in a DSP plan. It’s one of the reasons that we say a settlement is best used if most of your accounts are in collections. That way, you’re not damaging your credit further to find a solution to get out of debt.
But consolidation often doesn’t work the way consumers intend. These solutions zero out your existing account balances. In most cases, the accounts stay open. That might seem like a good thing, but it’s often a recipe for disaster. You start making new charges because all your accounts are back to zero. But this just runs up new balances in place of the old. So, you end up with the consolidated debt, plus all the new charges to repay. In many cases, consumers end up with more debt instead of less.
The good news is that you can include consolidated debt in both debt relief programs we describe above. So, if you try some type of credit consolidation or debt consolidation loan and it doesn’t work, you can still use either of these debt relief programs.
By contrast, “settled in full” refers to a partial payment settlement agreement. You paid a portion of what you owed, then the credit card issuer discharged the remaining balance. So, the balance is gone “in full.” But even though the full amount is closed out, it doesn’t mean you paid it off in full. As a result, this is considered a negative remark on your credit. An account that’s settled in full will negatively impact your credit score. The remark remains on your credit for seven years from the date the account originally became delinquent.
Article last modified on August 7, 2019. Published by Debt.com, LLC