What are Credit Card Debt Relief Programs?

What are Credit Card Debt Relief Programs?
BY Aly J. Yale
Mar 31, 2022
Key Takeaways:
  • Credit card debt relief programs can help you with unaffordable credit card debt.
  • Programs include credit counseling, debt negotiation, debt management, debt consolidation, and debt settlement.
  • You can DIY your credit card relief or hire professionals.

Credit card debt can often feel a downward spiral. Growing balances make it hard to stay current, and getting debt-free seems impossible. Are you dealing with high credit card balances and can’t seem to make a dent? Here’s how a credit card debt relief program can help.

What is a credit card debt relief program?

A credit card debt relief program can include any number of professional plans designed to address credit card balances and other unmanageable debts. 

Some of these programs may include financial counseling services, negotiations with creditors, repayment plans, consolidation loans, or a combination of these. 

In general, these programs help consumers pay off their debts as quickly as possible, avoid any unwanted consequences (like bankruptcy, for example), and, in many cases, even reduce the total debt they owe in the long run.

How do credit card debt relief programs work?

The exact process depends on what type of credit card debt relief program you choose to utilize.

Let's take a look at the major types of relief programs out there and how each one works to your advantage.

Credit counseling

Credit counselors are professionals who are trained in debt relief and other financial topics. They can 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 achieving 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.

Your credit counselor may require you to close out your credit cards. This ensures you don't add to your debt load while working with your counselor to reduce it.

Debt management plans

Credit counseling agencies may help you consolidate your debt into a debt management plan (DMP). When you enroll your credit card debt into a DMP, a credit counselor contacts your credit card companies and may negotiate lower interest rates, reduced monthly payments, or get penalties waived. You make a monthly payment into the plan to cover the payments on your debts plus a management fee. The credit counselor distributes your payment among your creditors. 

When you enroll in a DMP, you normally close your credit cards to prevent you from adding to your balances. Debt management plans can work if the payment is affordable and you stick with it. However, DMPs fail when participants can’t make the payments.

Debt consolidation

Consolidating your credit card debts with a loan can be more effective if you get better terms. Better terms can mean a smaller payment, a lower interest rate, or both. 

The most popular debt consolidation loans are personal loans and home equity loans. Note that sometimes the payments on the debt consolidation loan can be higher than the payments on your credit cards even though the interest rate is lower. That’s because credit card minimum payments are often designed to keep you in debt for decades, but you’d pay off a personal loan much faster.

Another option is a balance transfer card. These cards come with promotional interest rates — typically zero — that last for a year or two. You transfer your other card balances to them (for a fee) and then enjoy 12 to 24 interest-free months. This can often make it easier — not to mention faster — to pay down your principal balance. Just make sure you have the funds to pay it off in full before your promo rate expires (it will usually go up quite a bit after that point).

Debt settlement

Debt settlement means getting your credit card issuer to discount your balance in exchange for a lump-sum payment. However, most people with debt problems don’t have that much cash on hand, and most creditors won’t consider settling with customers who have been making their payments. So you’ll probably have to stop paying your credit card accounts and put the money into savings instead. This helps you build a debt settlement fund and to convince your creditors that you can’t afford your credit card payments. 

When you have saved enough, you or a debt settlement professional negotiates an amount with your creditors to settle the account. Debt settlement companies charge a fee when the account 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 (after settling) exceed your assets. 

Can you DIY your credit card relief?

The above are all professional debt relief programs, so they will often come with a fee. In some cases, you may pay a flat fee for the service or debt management plan, while in others, you may pay a percentage of the debt managed, settled, or negotiated. 

Sometimes, credit counseling may be free, particularly if you use a nonprofit organization or government agency for your services. The availability of these varies based on your location.

You can also choose to DIY your credit card relief. 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 can 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.

Keep in mind that this is no easy feat — nor is it 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 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, though, so compare companies before moving forward. You should consider each company’s fees, experience, customer reviews, and full scope of services, and check for membership in professional organizations, like the Financial Counseling Association of America or the American Fair Credit Council. 

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 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. This isn't without consequence, though. 

Chapter 7 bankruptcy can also cause you to lose property (like your car, for example), and it can remain on your credit report for anywhere from seven to 10 years, severely limiting your financial options for the next decade. It may be hard to lease a new car, buy a home, or even get an apartment.

Unless your income is very low, you won’t qualify for Chapter 7. Chapter 13 bankruptcy requires you to pay into a plan for 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.

Dealing with credit card debt

It’s critical to act fast if you can’t manage your debts. 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 and your long-term financial options.

You should also consider putting your cards out of reach entirely. Continuing to 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 can ensure you’re taking the best steps for your finances.