What are Credit Card Debt Relief Programs?

Getting rid of your credit card debt is an important step in taking control of your finances. A credit card debt relief program could be one way to deal with excessive credit card debt that you're struggling to repay.

What Is a Credit Card Debt Relief Program?

Credit card debt relief programs can refer to several different types of credit card debt assistance. Services provided by a debt relief program or company may include financial counseling, negotiations with creditors, repayment plans, consolidation loans, or a combination of these. 

In some cases, debt relief programs could help you pay off your debts, avoid bankruptcy, or get rid of your debt for less than you owe.

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How Do Credit Card Debt Relief Programs Work?

The exact process depends on what type of credit card debt relief program you use. Let's take a look at the major types of relief programs and how each one works.

Credit counseling

Credit card counseling is a service offered by nonprofit credit counseling agencies. Credit counselors are professionals who are trained in debt relief and other financial topics. 

A credit counselor could help you create a plan for tackling your debt, and they can also assist with general budgeting or advise you on increasing your credit score or reaching another financial goal you might have in mind. 

Generally, you'll meet with a credit counselor over the phone or in person for an initial consultation. You'll discuss your debts, income, assets, monthly expenses, and long-term goals during this time. From there, you'll create a plan and potentially schedule additional check-in meetings along the way.

Debt management plan (DMP)

If you qualify, your credit counselor may recommend a debt management plan (DMP). This is a plan to fully repay your unsecured debts within three to five years, with the guidance and support of the credit counselor.

When you enroll your credit card debt into a DMP, a credit counselor contacts your credit card companies and may negotiate lower interest rates or penalty waivers. Then, you'll make a monthly payment into the plan to cover the payments on your debts plus a modest plan management fee (usually $25 to $40). The credit counselor distributes your payment among your creditors.

The potential downside of a DMP is that you will probably be required to close your credit cards to prevent additional spending. Besides the inconvenience, closing credit card accounts is likely to have a negative impact on your credit score.

The success of your DMP depends on your ability to keep up with your plan payment each month.

Credit card debt consolidation and refinance

Refinancing your credit card debt means paying off your cards with another form of debt, such as a balance transfer credit card or a personal loan. If you use the new account to pay off multiple credit cards, you're consolidating your credit card debt into one payment.

Beyond simplifying your repayment, refinancing and consolidating your credit card debt could lower your monthly payment when you're able to refinance at a lower interest rate or if you opt for a longer repayment term.

There are three general methods to refinance and consolidate your credit card debt:

• Personal loans. Using a personal loan is a great option if you have at least good credit. Personal loans typically have much lower interest rates than credit cards. Your monthly payment may go up anyway if you were only making minimum credit card payments.

• Home equity loans. A home equity loan or home equity line or credit (HELOC) is an option if you own your home and have equity. Equity is the difference between your home’s market value and the balance left on your mortgage (if you have one). The interest rates can be very low, but you risk losing your home to foreclosure if you don't repay the loan.

• Credit card balance transfers. Most credit cards allow you to transfer a balance from one card to another for a 3% to 5% fee. This can be useful when you can transfer your balance to a card with a much lower APR—ideally, 0%. If you have good to excellent credit, you may qualify for a card with an intro offer that gives you 0% APR on transferred balances for a year or more. You'll start paying the card’s regular APR on any balance you carry after the intro deal expires.

Which method you choose will depend on how much debt you have, your credit scores, and your current interest rates. Consolidation works best for people with good credit who are still current on their payments.

Credit card debt settlement

Debt settlement is when you negotiate with your creditors to accept less than you owe and forgive the rest. You can negotiate debt settlement on your own or hire a professional debt settlement company to negotiate for you. 

Here's a basic rundown of how debt settlement may go:

• You need to build up a debt settlement fund so you have money to offer your creditors. To do this, some people choose to stop paying their debts. If you stop making payments, expect credit score damage. 

• Besides giving your budget room to save money for settlement offers, stopping payments shows your creditors you’re struggling to repay the debt and may make them more likely to negotiate.

• When you have saved enough, you or a debt settlement professional negotiates an amount with your creditors to settle the account. If a debt settlement company does this for you, you’ll pay a fee after the debt is settled. Fees range between 15% and 25% for most providers. 

• You will owe taxes on forgiven amounts unless you can show the IRS that you are insolvent. Insolvent means your debts (before settling) exceed your assets. 

• Debt settlement could let you get rid of your debt for less than you owe, but it's not without downsides. Consider all the pros and cons of debt settlement when looking at your debt relief options.

Can You DIY Your Credit Card Debt Relief?

Yes, you can use most of the above methods on your own. You can create your own debt repayment plan, seek out a way to consolidate and refinance, and/or negotiate with your creditors without outside assistance. 

For the best DIY credit card debt relief success, first take the time to educate yourself on your situation and options. Check your credit scores, organize your debts, and find reliable financial education resources online.

To emulate what a professional might do, you’d want to call up your creditors and try to negotiate or settle your debts directly. You could also ask about setting up a payment plan or getting a discount for paying upfront or all in cash. Sometimes, you may be able to claim hardship and see your debts reduced as a result.

Getting debt forgiveness is no easy feat—and it’s not without hassle. You may need to spend a significant amount of time on the phone and on hold, particularly if you have debts with multiple creditors.

How to Choose a Credit Card Debt Relief Program (and Avoid Scams)

There is no federal credit card debt relief program, so you’ll need to look to private debt relief companies and nonprofit credit counseling agencies if you want help managing and paying down your credit card debt. 

There are many options. Compare companies before moving forward. You should consider each company’s fees, experience, customer reviews, and full scope of services. Also check for membership in professional organizations, like the Financial Counseling Association of America or the American Association for Debt Resolution.

Be wary, too, as scams are common in this industry. Some red flags to watch for include:

• Hidden/unclear fees or fees required before any work is completed 

• Guarantees about how much debt they can eliminate

• Claims they can stop all collections efforts

• Companies that tell you to stop communicating with your creditors without warning you of potential legal repercussions 

The Better Business Bureau and your state’s attorney general office are also good resources if you want to check for worrisome complaints or potentially fraudulent behavior before working with a company. 

Alternatives to Credit Card Debt Relief Programs

A final option may be bankruptcy. With a Chapter 7 bankruptcy, credit card debt—as well as other types of unsecured debt—can typically be discharged in full (forgiven). 

In a Chapter 7 bankruptcy, you could lose some of the things you own. Also, the bankruptcy will remain on your credit report for anywhere from seven to 10 years

Not everyone will qualify for Chapter 7 bankruptcy, as it has a very low maximum income threshold. 

Chapter 13 bankruptcy is easier to qualify for. This is a restructuring of your debt with a repayment plan that will last three to five years. A judge decides how much you have to pay, and you may not agree with that amount or find it comfortable. The calculation is such that your payment will amount to all of your disposable income.

For both kinds of bankruptcy, there are court fees and most people hire an attorney. People who have attorneys have more successful outcomes than those who don’t. 

Dealing With Credit Card Debt

The sooner you tackle your credit card debt, the better. And this is especially important if you haven't missed any payments yet. 

Before you miss a payment, contact your credit card company and ask for potential solutions. They may offer hardship plans that can help you get back on track. This might also keep them from reporting your account as delinquent, which could hurt your credit score.

You should also consider putting your cards out of reach entirely, or close the accounts. Continuing to add to already-high balances can only worsen the issue and make conquering that mountain of debt even more difficult.

Finally, get in touch with a professional as soon as possible. Whether it’s a paid debt relief company or a nonprofit credit counselor, getting professional help could ensure you’re taking the best steps for your finances.