You’ve finally come to terms with the fact that you need help to get out of debt. Good. Now you can get going in earnest. However, you’re facing a veritable cornucopia of relief options. Which one should you choose? Look no further. We’ve got the pros & cons of the top credit card relief strategies.
What Is Debt Relief?
May as well start there. Debt relief could mean erasing your debts altogether through bankruptcy, getting your interest rate or payment schedule changed to reduce your payments, or getting creditors to accept less than the total amount owed.
Debt relief can take a variety of forms, the most common being debt management, debt consolidation, debt settlement and, as we mentioned above, filing for bankruptcy protection. The one you choose will depend upon several factors; chief among them are the size of your debt load and your ability to make the monthly payments required to properly service it.
When Should You Seek It?
According to FreedomDebtRelief.com, credit card relief should be on your radar if you can’t see yourself paying your accounts off in full within five years – even with extreme belt tightening.
You should also consider one of these strategies if the total of your debt equals at least half your gross income.
Relief Through Debt Management
Typically managed by a credit counseling agency, debt management entails handing over the payment of your credit card debt to a third party. You’ll combine the monies you’ve been forwarding to your creditors each month and send it to your debt manager instead. Meanwhile that person has renegotiated your loan agreements with your creditors to secure lower interest rates and fee waivers in exchange for guaranteed payment.
- Your accounts will be paid in full.
- You’ll make a single monthly payment, which gives you sort of a de facto consolidation deal, without applying for an additional loan.
- Most debt management programs will garner more favorable interest rates and often get creditors to pass on collecting the accrued fees.
- You’ll work within a fixed set of parameters, which can introduce added discipline to your repayment processes.
- Debt managers provide guidance in terms of budgeting and other financial education topics.
- You’ll surrender control over a significant aspect of your financial life
- Debt management carries fees, which can vary according to the amount of your outstanding debts.
- You’ll be signing up for an extended relationship with your debt manager, as these programs can take three to five years to complete.
- You will be forbidden from opening new credit accounts. You might also be required to close certain accounts, which can have a negative effect on your credit score.
Relief Through Debt Consolidation
With this strategy, you’re rolling multiple debts into one, leaving you with just one monthly payment, hopefully with a lower interest rate. This can be accomplished through a personal loan or balance transfer credit card.
- If you have good credit and can qualify for good rates, you can use debt consolidation to clear your debts.
- You usually have just one payment to make each month.
- Consolidation could improve your credit utilization, which could raise your scores.
- If you don’t have the credit to qualify for the best rates, consolidation likely won’t help you.
- There are usually fees involved with balance transfers.
- A balance transfer may not be helpful if you can’t clear your accounts before the promotional interest rate period expires.
- You don’t get financial education assistance.
Relief Through Debt Settlement
This is where you enlist a company to negotiate with your creditors to try to get them to “settle” your accounts for less than what’s owed. Rather than paying creditors directly, you make monthly deposits into a savings-type account from which settlements will be paid in full with one-time payments of a lesser amount than you currently owe.
- Successful negotiations mean you’ve saved cash by paying less than the full balance owed.
- You avoid bankruptcy, which could stay on your credit report for up to 10 years.
- You get creditors and collectors off your back.
- You may have to pay tax on any forgiven debt, which would cut into settlement savings.
- Settlement may cost you between 15% and 25% of the enrolled debt. T
- Your credit scores will take a hit due to the debt relief process, but then, they’re probably not great these days anyway if this is looking like a viable path. Your scores will rebound once you can successfully complete the program and handle your affairs accordingly.
Relief Through Bankruptcy
With this legal proceeding, you can have your debts discharged altogether. Your choices are Chapter 7 and Chapter 13.
- For some, this may be the best way to emerge from debt.
- Chapter 7 is usually quick, compared to Chapter 13.
- Financial education is required.
- Bankruptcy has a ginormous impact on your credit scores. Notice of a Chapter 7 filing will stay on your credit report for a decade. Chapter 13, seven years.
- You may have to relinquish assets.
- Chapter 13 takes three to five years to finish.
- You must shell out for court costs and attorney fees.
Now you know the pros and cons of the major forms of credit card relief. Determining which one to choose is usually a function of your outstanding debt amount, your ability to make monthly payments and whether or not you can qualify for a consolidation loan.
It’s prudent to carefully consider the downside of each of these strategies to determine with which you can live most easily. After all, getting into any one of these programs and falling out if it can make your problem go from bad to worse. You’ll have fewer remaining choices and the consequences of the options with which you will be left will be much less favorable than those of the one at which you failed.
So, before signing up for any one of these, take careful stock of your circumstances and being realistic with yourself about why you’re in this situation. This will help to ensure you’ll make a decision with which you stick for as long as it takes to put your situation straight.