What is Credit Card Debt Relief? Here’s What You Need to Know
There are a lot of funny tweets and memes about how millennials don’t have enough money to buy houses or cars — and with most of those jokes, the punchline is “avocado toast”. Unfortunately, debt is no laughing matter. Millennials, in particular, are not amused, as they owe some $1.1 billion in consumer debt — nearly a third of the nation’s total of $3.6 billion! If you are struggling to pay back lots of debt, you may have become intrigued by advertisements promising debt relief. But what is credit card debt relief, and is it a good idea? Read on for our comprehensive guide to debt and debt relief.
The Basics of Debt
Before we answer the question “what is credit card debt relief,” it’s important to understand that having no debt whatsoever can also be detrimental to your credit score and your overall financial health. We know that sounds counter-intuitive — shouldn’t everyone strive to be debt-free? Not exactly. Here’s why.
Watch This Short Video Explaining The Negative Impact of Credit Card Debt
Understanding Debt’s Impact on Your Credit Score
The scoring model that determines your credit score uses your “credit utilization ratio,” also known as “debt-to-credit ratio” as part of its calculation. This essentially refers to the ratio of the debt you’ve incurred to the available credit you have.
Let’s say you have a credit card with a $1000 limit, but you’ve used $200 of that to buy some new clothes. Your credit utilization ratio for that card is 20%, which isn’t bad; FICO (the organization that most banks and creditors use to evaluate consumer credit) recommends a credit utilization ratio of under 30%.
The Importance of Paying On Time
Additionally, it’s smart to show that you can use your credit wisely before you have to ask what is credit card debt relief.
Your payment history accounts for some 35% of your credit score. Paying off your debts, whether on a VISA card or a student loan, on time shows sound financial management. That’s advantageous when it comes time to apply for additional credit, a mortgage, or an auto loan.
Not paying on time, charging more than you can afford to pay off in a timely fashion, or not having any credit cards at all can damage your credit score.
If you haven’t asked for an increase in your credit limit in the past six months, and if your income has remained the same, you can request an increase. That can help your credit utilization ratio — as long as you aren’t tempted to use the increase in credit to rack up even more debt.
How Much Debt Is Too Much?
Back to the topic at hand, “what is credit card debt relief.”
Let’s say you’re in over your head. You have maxed out your credit cards, with no clear path to pay them off over the next few months.
If you haven’t been able to make payments on your balances, your debt is definitely no longer the good kind. And as you probably are already aware, paying off only the minimum balance each month — while better than making no payments at all — can also compound the problem, literally.
The interest on your credit cards continues to grow, so you fall further into the hole if you can’t pay off any of the interest.
Using a Budget to Get Back On Track
Maybe the situation is temporary; if you had an unexpected medical bill or needed emergency car repairs. It might not be too hard to get caught up.
Find additional income — take on a temporary part-time job or ask for more hours at your current position — and you’re golden. Otherwise, you will have to spend less. The key to doing this is making, and sticking to, a budget.
It might not sound like much fun, but budgets are extremely useful. They let you know where your money is going each month. In fact, you might be surprised at how much cash you are frittering away on unnecessary expenses.
There are many ways to create and track your budget. What it all boils down to is keeping a strict account of every penny that comes in and goes out.
Personal finance apps for your smartphone are a convenient way to track your expenses since you’re likely to have your phone close at hand every time you make a purchase or pay a bill.
Once you understand where your money is going every month, it’s easier to see where you can cut back.
Cutting Back on Luxuries
Eliminating entertainment expenditures is relatively painless, especially if it’s just for a couple of months. Start saying no to movies with friends, or cancel your subscription services such as Netflix or Spotify. You can always re-join when your finances are back in hand.
If you’re accustomed to buying a $5 green smoothie or Frappuccino every day, try doing without or making your own. Those five bucks might not seem like an exorbitant amount when you’re forking it over at the cafe. However, the savings can add up and make a dent in your debt.
Call Your Creditors
Contrary to popular belief, creditors are not the devil incarnate. They’re likely to be quite reasonable. Particularly with people who have a pretty good history of paying their bills on time.
Chances are very high that if you call, explain the situation, and ask for some temporary help, they’ll grant it. They will work with you to create a modified payment plan. They may reduce your interest rate if you’ve been a solid customer. On the off chance that they say no, you haven’t lost anything by asking.
What Is Credit Card Debt Relief And How Do I Cure It?
Let’s say things are a little more dire than that. You’ve quit Netflix cold turkey, said goodbye to Jamba Juice, and adopted all the frugal habits that you possibly can. There are times when belt-tightening just isn’t enough.
Negotiation with your creditors worked for a while, but now you’re falling behind on even your modified repayments. Now they have turned you over to a debt collection agency. Anyone who’s experienced telephone calls from a collection agency can tell you how stressful it is.
After a while, people who are deep in debt start to reject their phone calls or stop opening their mail. Sticking your head in the sand isn’t going to make the problem go away.
Credit card debt relief, on the other hand, can help you get out from behind the financial eight ball. There are a few caveats, however. We’ll talk about how to protect yourself from scams in a little while. First, let’s discuss the types of credit card debt relief that are available.
Types of Debt Relief
When you have done all you can to climb out of debt, but you’re still drowning, it’s time to get some help.
Working with a non-profit credit counseling agency is one solution for people who are struggling with debt. It will also take some work on your part. Most credit counseling won’t cost you anything, but make sure you check. Some for-profit agencies do charge for this service.
Together, you and your credit counselor will evaluate your debt and develop a workable budget. The counselor will also make suggestions as to what is credit card debt relief that you should pursue. Including which steps to take next.
In order to find your way out of debt, you will need to follow the counselor’s advice. Following their guidance and sticking to a budget may not be easy. Many people quit a credit counseling program before they see results. Be prepared to persevere if you choose this method.
Debt Management Program
Ask your credit counselor what is credit card debt relief, and she may suggest debt management. Under this approach, your debts are combined, so you write only one check each month. Usually, this will result in a lower monthly payment. And with a lower interest rate than you would have with paying off your obligations separately.
A debt management plan can take up to five years to implement. If you follow it to the letter, you’ll reap the reward of seeing your credit score improve.
What is credit card debt relief when it takes the form of debt consolidation? This solution is similar to debt management, in that you will pay one lump sum each month. The big difference is that your not using an agency to organize your debt. In fact, with consolidation, you take out one loan to pay off all your creditors. Then, in turn, you pay off that loan.
This option isn’t for everyone.
You may not qualify for the debt consolidation loan, and there may be interest fees attached. As always, be sure to read the fine print. And if you default on a secured consolidation loan, your car, home or other assets may be in jeopardy.
What Is Credit Card Debt Relief Settlement?
Debt settlement entails negotiating with your creditors to pay less than what you actually owe. Sounds great, right? Not so fast. There are several potential pitfalls associated with debt settlement.
First, not every creditor will accept a settlement. Your best bet in this instance is to work with a company that provides debt settlement negotiation. Yet their expertise will cost you. Translation, you may not end up saving all that much in the long run.
Some settlements can go as low as 50% of your total debt. It’s more likely that you’ll pay 60-80% of what you owe — and that’s before the settlement agency’s fee. When all is said and done, you might only get 10-20% off your total debt.
Isn’t that still better than nothing?
Well, it’s a trade-off. Your credit score will almost certainly take a hit if you go the settlement route. Creditors will report your debt as “settled for less than agreed” for seven years. Additionally, they may also report your payments as late, even though they’re originating with a settlement company.
So you’ll likely have a long road ahead. You may care more about saving a small amount than about rebuilding your credit. People who are used to having a very poor credit rating could find this option attractive.
Check Out This Informative Video By Dave Ramsey Explaining To A Caller How To Handle His Credit Card Debt Relief Settlement
Your last resort when wondering what is credit card debt relief? Bankruptcy. Again, this is generally only for people who are truly in dire economic straits, since there are multiple downsides.
First, you’ll have to work with an attorney, which isn’t cheap. The attorney will provide advice regarding the type of bankruptcy you should choose. Chapter 7 cancels your debts, while Chapter 13 sets up a payment plan lasting 3 to 5 years.
In addition, he or she will provide a buffer between you and your creditors. They will no longer be legally allowed to contact you directly. This is one of the upsides.
Filing for bankruptcy will give you a fresh financial start, but it will also destroy your credit score. It can be difficult to rebuild your credit after declaring bankruptcy. For the next seven to 10 years, you will likely be unable to get any type of credit card except those with prohibitively high interest rates.
Bankruptcy also won’t excuse you from paying off certain debts and obligations. Commitments like alimony, child support, back taxes, or student loans still apply. This is a safety net that has helped many people get back on their feet economically. You should think long and hard before committing to bankruptcy.
Ask yourself what is credit card debt relief worth to me?
What Is Credit Card Debt Relief Fraud?
Understanding the differences when learning what is credit card debt relief is a great first step.
Next, make sure you understand what any company or service you’re considering actually provides. Unscrupulous services may try to bamboozle you with different terminology or false promises. Be wary of anyone who says they can completely wipe out your debt for a low fee. In addition, stay away from services who ask for payment up front.
Once you’ve narrowed down the list of potential debt relief companies to work with, check with the Better Business Bureau. In addition call your state Attorney General’s office to see if there have been complaints lodged against them. And don’t be afraid to use your intuition; if a company seems shady, or if you simply have the feeling they’re not on the up-and-up, keep shopping around.
Finding the answers to what is credit card debt relief isn’t for the faint of heart. However, with a little research, some due diligence, and commitment you can find those answers. Making your own financial well-being a priority, you can get yourself out from underneath the crushing weight of debt.
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