Glimpses of the end of pandemic life are starting to become evident. However, many of us are also now coming face to face with the fact that a lot of living was done on credit over the past year. For some, this will mean a new form of hardship. This is particularly true for those whose finances were tenuous even before the virus took hold. As a result, many people are considering some form of debt relief, which makes this a good time to look at how credit card debt relief companies work.
Types of Credit Card Debt Relief
Generally falling into one of five categories, credit card debt relief strategies include credit counseling, debt consolidation, debt management, debt settlement, and bankruptcy protection. Each of these has its own specific circumstances, advantages, and pitfalls, so let’s take a quick look at each one.
Credit Counseling
Roundly accepted as the best place to start when credit woes loom large, counseling can help you find avenues through the situation you might have overlooked. Among the services provided by credit counseling firms are debt management advice, budgeting strategies, and consumer credit information.
The primary goal of a credit counselor is to help you find a way to deal with your credit card debt while maintaining your current standing with the credit rating agencies. In other words, they try to help you resolve the situation while keeping your credit score as close as possible to where it is.
Sometimes a fresh pair of eyes is all that’s needed to help you reconfigure your finances to make satisfying your obligations more readily accomplished. This can come in the form of budgeting advice, restructuring payment agreements, or shaping a different approach to your particular set of circumstances.
Debt Consolidation
This tactic can take a number of different forms. The most common are balance transfer cards, personal loans, and mortgage-backed loans such as cash-out refinancing and home equity lines of credit.
Balance transfer cards can often be had with interest-free cardholder agreements for a period of 18 months or more. This gives you an opportunity to pay off your balances while accruing no additional interest charges. However, this form of credit card debt relief works best when you transfer only that which you can pay off before the introductory period elapses. Otherwise, you could find yourself looking at even rates approaching 29% or more.
Speaking of which, when choosing between personal loans and mortgage-backed instruments, one of the key considerations is to ensure the interest you’ll pay on those loans is less than you’ll pay in aggregate on the debt you consolidate.
While personal loans carry the least amount of risk, they also carry higher interest charges than you’ll encounter when tapping into your home’s equity. On the other hand, though, should you be forced to default on the personal loan, you’ll simply ruin your good name. Do the same with a home equity-based solution and you could lose your home, as you’ll pledge your residence as collateral for that type of loan.
It should be noted you’ll need a pretty high credit score to get the most out of any of these coping mechanisms. Therefore, they are best attempted when you first see trouble coming – rather than after waiting for it to hit.
Debt Management
Credit counselors, who will also negotiate with the people holding your debts for interest rate reductions and fee waivers to make your accounts easier to resolve, usually administer debt management programs.
You’ll sometimes see this option listed as a form of debt consolidation. This is because rather than paying each of your creditors on an individual basis, you’ll make consolidated monthly payments to the counselor, who in turn will issue disbursements to your creditors.
The upside is achieving the credit card debt relief you seek. The downside is you’ll turn that aspect of your finances over to a third party, forego opening new credit accounts, and agree to close certain accounts altogether.
In other words, you’ll cede control over a key aspect of your life.
Debt Settlement
This tactic is similar to the one above in that you’ll work with a third party as a go-between. However, settlement firms take things a step further and ask creditors to forgive a portion of the principal amount of the loans in addition to fee waivers and interest rate reductions. In exchange, the settlement firms agree to provide debt holders one-time payments in full of the agreed-upon settlement amount to consider the account paid in full.
To accomplish this, you’ll stop paying your creditors altogether and deposit those funds into an escrow-like account from which your settlement payments will be drawn instead. However, you’ll have to build up the fund first, which means a number of months will elapse during which no payments are made on your accounts. This will wreak havoc on your credit score, as well as potentially trigger threats of legal action. Many creditors will chill once they learn you’re working with a debt settlement firm, however, your nerves will get a workout in the process.
Here, it’s important to note there are no guarantees where debt settlement is concerned. While it’s true many issuers will accept settlement plans rather than take a chance in bankruptcy court, some do not. Moreover, the settlement industry does have its share of charlatans, so you have to be careful when choosing a firm with which to work.
Bankruptcy Protection
Most experts consider this the option of last resort because the downsides are so steep. While bankruptcy protection will indeed relieve you of credit card debt, it also ruins your credit for a period of seven to ten years – depending upon the form of protection you choose, Chapter 7 or Chapter 13.
Under a Chapter 7 filing, credit card debts will be discharged, however, you could be required to surrender the certain personal property. Chapter 13 allows you to keep the property in exchange for agreeing to accept payment plans to help make your creditors whole.
When it comes to choosing the best strategy for your circumstances, you’ll find a variety of organizations offering one or more of these approaches. Understanding how credit card debt relief companies work can help you choose the path most likely to lead you to success – and show you which routes to avoid.
