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Credit card debt is a financial burden for many Americans.
In fact, an April 2020 survey of Credit Karma members found they hold around $6,146 in credit card debt on average, with some generations and geographic groups holding much higher average debt.
Many factors could turn your credit cards into a source of financial stress, including economic conditions, high interest rates and high balances carried from month to month. If you’re struggling to keep up with the monthly payments on your credit cards, you may have options for credit card debt relief — but you’ll want to beware of third-party debt settlement programs that might try to scam you.
- What is credit card debt relief?
- Should I seek credit card debt relief?
- What kinds of credit card debt relief are available?
- What are potential pitfalls of credit card debt relief?
- Next steps: Find the relief that’s right for you
What is credit card debt relief?
If you’re dealing with a crushing credit card balance, you may consider anything that helps you manage that debt to be a relief. And it’s true there are many ways to alleviate your debt.
Creating that breathing room can involve something you do on your own, such as using a lower-interest personal loan or credit card to pay off high-interest credit card debt. While this will not eliminate the amount you owe, it may help you to pay off more of your principal balance faster. Relief could also come from a formal negotiation between you and your credit card issuer that actually lowers the amount of debt you need to pay back.
How to manage credit card debt
Should I seek credit card debt relief?
Credit card debt relief may be worth pursuing in these situations.
- Your credit card debt is making it difficult to pay other bills.
- You’re receiving collection notices.
- You’re feeling overwhelmed by your debt and overall financial situation.
What kinds of credit card debt relief are available?
There are a few options available to help you make your credit card debt more manageable. You’ll have to do some research to decide which is the best move for your situation, but each of the following paths may be worth a look.
Credit card balance transfer
Transferring debt from a credit card with a high interest rate to one with a lower interest rate is one step you can take on your own. If you qualify for a balance transfer card, you may be able to secure a lower interest rate, which could help you pay down the debt principal faster.
While this tactic won’t relieve you of the amount of debt you owe, a balance transfer can also allow you to consolidate multiple credit card balances into one — essentially repackaging your debt and simplifying your bills.
But be aware that balance transfers can be complicated and come with plenty of risks. You may also have to pay a balance transfer fee — usually a percentage of the amount being transferred — and low promotional interest rates (typically 0%) only last a limited time. To get the most benefit from your balance transfer, you’ll want to pay off as much of the debt as possible before the promotional rate ends and the APR increases.
Learn more about balance transfers.
- What is a balance transfer?
- How does a balance transfer work?
- The pros and cons of balance transfers
- 5 things to watch out for with intro balance transfer offers
Consolidate with a personal loan
Another way to possibly reduce the amount of ongoing interest payments on your credit card debt is to consolidate your debt into a lower-interest personal loan. After taking out a personal loan that has a lower interest rate than your credit cards, you can use the loan to pay off your credit card debt — giving you a chance to pay it down faster with one simplified monthly payment.
As with credit card balance transfers, consolidating credit card debt into a personal loan won’t reduce the amount you owe, but may boost your effort to get the debt under control.
Learn about consolidating credit card debt.
- Should you take out a loan to pay off credit card debt?
- Getting a debt-consolidation loan with bad credit: How to do it
- 7 ways to consolidate credit card debt
- How does debt consolidation affect my credit scores?
Debt management plans
Nonprofit credit counselors generally can help you set up a debt management program, also called a debt management plan. Typically, debt management plans should help you pay off your debt in full over a set period of time. Your credit counselor may negotiate directly with your creditors on your behalf, and creditors may agree to waive fees or lower your interest rate.
When you have a debt management plan, it may involve making one lump payment every month to the nonprofit, which then sends the money directly to your creditors.
Learn more about debt management plans.
Negotiate with your credit card company
Debt settlement basically means negotiating with a creditor — in this case, your credit card issuer — to accept a lump sum payment that’s less than the amount you owe. There are two ways to negotiate a debt settlement: on your own working directly with the creditor or with the assistance of a third-party (and usually for-profit) debt settlement company.
Debt settlement programs may help you reduce the amount of your debt and avoid getting into more dire financial straits, like bankruptcy. Some credit card issuers may offer other relief such as a lower interest rate, a smaller minimum payment, lower fees and penalties, or a fixed payment schedule.
But these companies may encourage you to stop making payments on your debt before reaching an agreement with your creditor. If that’s the case, your credit can be negatively affected, so think carefully before entering into any agreement.
Learn more about debt settlement.
- Understanding debt settlement: Is it worth it?
- How to negotiate debt with your credit card company
- How a hardship plan can affect your credit
Beware of debt relief scams
Debt settlement through a third party is already full of risks that could affect your credit scores or even leave you owing more. Some companies that claim they’ll help you settle debt are nothing more than scammers that promise more than they might be able to deliver.
The Federal Trade Commission points to some warning signs that a debt relief company may not be legit. Watch out if the company does the following:
- Guarantees it’ll make your credit card debt disappear
- Charges fees before settling your debt
- Claims it can get you into a new government program for people with credit card debt
- Fails to explain the consequences of halting payments and communications with your creditors
- Pledges to stop all collection calls and legal actions
- Guarantees it can settle your credit card debt for pennies on the dollar
Bankruptcy: The last resort option
Bankruptcy’s effect on your credit is severe and can last for many years, so it’s critical to explore and exhaust all other options before considering bankruptcy. If you decide to pursue bankruptcy, the two kinds most commonly used for individuals are Chapter 7 and Chapter 13. Your circumstances will determine which type you should file.
Take note: Bankruptcy doesn’t necessarily discharge all your debt. Certain forms of debt, like student loans, can be very difficult to discharge, and the bankruptcy courts will ultimately decide how much of your debt gets eliminated.
Learn more about bankruptcy.
- What is a bankruptcy discharge?
- What’s the difference between Chapter 7 and Chapter 13 bankruptcy?
- What is Chapter 7 bankruptcy?
- How to complete the Chapter 7 bankruptcy means test
- What is Chapter 13 bankruptcy?
- How long does bankruptcy stay on your credit reports?
What are potential pitfalls of credit card debt relief?
While the prospect of getting relief from high credit card debt can be appealing, some solutions come with potential drawbacks.
- Debt settlement and bankruptcy can affect your credit. While these efforts can help manage your debt payments, they can also affect your credit for several years. Not having repaid your credit according to the original terms of your credit agreement can stand out to potential lenders, so think about long-term consequences when seeking short-term relief. Plus, if your debt settlement company advises you to stop paying your creditors directly, you could be subject to additional interest charges and late fees. (Debt consolidation can also affect credit scores, though the impact typically is more minor and more temporary.)
- Credit card debt relief may cost you money. If you take out a personal loan or a balance transfer card to pay off credit card debt, you’ll likely face fees and interest. Similarly, declaring bankruptcy could mean you need to pay court costs, and even nonprofit organizations and credit counselors generally charge for their services.
- Discharged or reduced debt can affect your federal income taxes. If you have your credit card debt forgiven, the IRS will likely view your canceled debt as income and tax accordingly.
Next steps: Find the relief that’s right for you
If you’re struggling with credit card debt and aren’t sure what tactic will bring you the most relief, it’s worth considering talking to a nonprofit credit counselor. A reputable credit counseling organization may be able to help you understand your options and develop a plan to manage your finances and pay off debt.
Paying down credit card debt can be difficult, but with the right information and some help, you can take on the challenge and succeed.