What are your options for credit card debt relief?

Credit card debt is easy to get into but difficult to get out of. Fortunately, there is credit card debt relief available to help you reset your financial situation and get back on the right path. There are plenty of debt relief options to fit a wide range of financial situations and needs. 

Below, we'll outline what credit card debt relief is, the options you have, and how they help you get out of debt.

What is credit card debt relief?

Credit card debt relief is an agreement between you and the credit card company meant to help you get out from under debt you can no longer afford. The goals of credit card debt relief are twofold. You get the help you need to get out of debt, and the credit card company collects at least a portion of the debt you owe.  

Some of the most common credit card debt relief options include debt consolidation, debt management, debt settlement, and bankruptcy. You can also opt for a less conventional option like a 0% balance transfer. 

Debt consolidation

Debt consolidation is a popular debt relief option because it can reduce your monthly minimum payments and interest rates. It also simplifies things by rolling several payments into one and converting your credit card payments into a fixed-term loan with a firm payoff date. 

Say you had five credit cards with a $4,000 balance on each one. If each credit card has a 3% minimum payment and 25% APR, you will pay $480 per month in minimum payments for more than 280 months. In the end, your total interest paid would be a whopping $33,268. 

If you rolled that credit card debt into a $20,000 debt consolidation loan at 10% APR with a 60-month payoff term, you would pay around $425 per month and only $5,496 in interest.

That not only saves you about $55 per month and 220 months of payments, it also saves you over $27,000 in interest charges. It's a win-win. 

There are several types of debt consolidation loans to consider. 

Traditional debt consolidation

Your run-of-the-mill debt consolidation loan can come from a bank or credit union, but they are generally issued by lenders that specialize in debt consolidation. 

Specialized debt consolidation companies offer flexible terms and will present you with multiple options for monthly payments, interest rates, loan fees, and more. Many will even present you with rough terms without a hard inquiry on your credit, which won't affect your credit score. 

Be wary of debt consolidation companies that source loans from other lenders instead of offering loans themselves. You can identify these companies relatively easily, as they will refer to their “lending partners” or say that a lender will reach out to you. 

These loan-sourcing companies tend to charge huge fees — 10% or more — just to find you a loan. They tend to bury this fee in their terms before finding lenders for you, which is another reason it’s so important to read all the terms and conditions before agreeing to anything. 

Home equity line of credit

A home equity line of credit (HELOC) requires you own a home that's worth more than you owe on the mortgage. You can take out a percentage of this equity as a HELOC and use the cash to pay off your debt. 

Since a HELOC is tied to your home mortgage, it often has a significantly lower interest rate than other debt consolidation options. The downside is it suddenly puts your home up as collateral against your credit card debt, so the lender could foreclose if you default on your loan. 

Line of credit

If you don't own a home, you can still get a line of credit to pay off your debt. The Tally line of credit, for example, offers a revolving credit account — an account you can use multiple times to pay off several credit cards — with an interest rate that's generally lower than your credit cards charge. On top of saving you money on interest, you also roll all your payments into one. And because this is a revolving account, you can use it multiple times to pay off several credit cards.

Tally also offers a Debt Manager that works as a robo-advisor to help you create a get-out-of-debt plan that works for you. What's more, the Debt Manager adjusts to you, so you never feel forced to make payments you can't afford. 

Debt management plan

A debt management plan is a two-way agreement between you and your credit card companies with the help of a credit counseling agency. These credit counseling agencies are usually nonprofit companies that work with a wide range of debt issues and know the ins and out of getting you out of debt. 

They will negotiate with your credit cards on your behalf to eliminate fees, lower interest rates, or even reduce your total balance. Though they are usually nonprofit organizations, there may be small startup and monthly fees for their services. In some cases, you may qualify for a fee waiver, though. 

Once the credit counseling agency sets the terms, you start making payments directly to the agency. The agency distributes your monthly payments to the credit card companies. Once you satisfy the terms of the debt management plan, the credit card companies mark your debts as paid in full on your credit report. 

A debt management plan will have no immediate negative impact on your credit score either. Your credit report will have a note stating you're enrolled in a debt management program, but according to the National Foundation for Credit Counseling, this is not a factor on your credit score. 

The downside to a debt management program is not everyone will qualify. You must have a verifiable financial hardship to qualify for these services.  

Beware of debt settlement companies posing as debt management companies. They are two very different things, and we will get to the settlement companies later. The NFCC website will help you find accredited, nonprofit credit counselors in your area.

Debt settlement

A debt settlement program is easy to confuse with a debt management plan, as they often offer similar debt relief options. Debt settlement companies will promise to lower interest rates, balances, and fees, but they have some serious red flags to consider before moving forward. 

While debt management focuses on working with your creditors to get you credit card debt relief without damaging your credit score, debt settlement companies entice credit card companies to negotiate by stopping all payments. The thought is once you stop making payments, the credit card issuer will be willing to settle for less than the full amount. 

This may work for some of your credit card debt, but there is no guarantee. Plus, though you may stop paying your credit cards, you still make a monthly payment to the debt settlement company. The company later uses these accrued monthly payments to offer your credit card companies lump-sum settlements. 

There is also the risk of significant negative hits to your credit score once you stop making payments to your credit card companies. Plus, the credit card company will tack on additional fees for late payments. 

And then there are the fees for the service itself. Debt settlement companies may charge you fees between 15% and 25% of the enrolled debt, according to the NFCC. So, you could pay upward of $5,000 in fees to settle $20,000 in debt.

Because debt settlement companies are for-profit and have fewer regulations than debt management plans, qualifying for the program is easier. 

Bankruptcy

Another credit card debt relief option is bankruptcy. There are two forms of consumer bankruptcy: 

• Chapter 13 bankruptcy: You must pay a court-determined amount to all unsecured debts for 3-5 years. The amount you pay is generally equal to all your nonexempt personal assets. Once you complete the terms, the court discharges your remaining unsecured debt. In Chapter 13 bankruptcy, you can keep your secured assets like your home and car. 

• Chapter 7 bankruptcy: This is the quickest route to credit card debt relief, but it is also the most dramatic. The courts liquidate all nonexempt assets, including your home, car, personal effects, and more, to pay off as much of your debt as possible. In 3-5 months, after the court liquidates all your assets, your remaining debt is discharged. 

While bankruptcy may seem like a quick fix to your credit card debt issues, there are serious consequences to it. First, if you file Chapter 7 bankruptcy, you may lose a significant number of assets. Sure, there are exemptions you can make to keep some property, but they are relatively small. 

On top of the potential asset loss, a Chapter 7 bankruptcy remains as a negative mark on your credit report for 10 years. A Chapter 13 bankruptcy remains on your credit report for seven years.

Bankruptcy also comes with filing fees of $335 for Chapter 7 and $310 for Chapter 13, as of April 2020. If you hire a bankruptcy attorney, you can expect additional fees of $1,500 to $4,000, according to Experian.  

0% balance transfer

Using a 0% balance transfer credit card as a debt relief method is unorthodox and there are some missteps to avoid, but it can save you big money in interest. 

If you have favorable credit, you've likely seen 0% APR promotional offers in the mail from credit card issuers. If you sign up for one of these cards, you will get a short period — generally 12-18 months — of 0% APR. You can transfer credit card balances with high interest rates to this 0% balance transfer card, which may reduce your minimum monthly payment and give you 12-18 months to pay it off with no interest. 

There are a few caveats to this plan, though. First, you must qualify for the 0% APR card, which means having a favorable credit score. Second, these cards typically charge a 3% to 4% balance transfer fee. So, if you transfer $1,000 onto it, you will pay a $30 to $40 fee. 

Consider you have five credit cards with $2,000 balances each and 27.99% APR. If these credit cards had a 3% minimum payment, you'd pay $300 per month for 272 months to pay off those cards.

If you got a 0% balance transfer card with a $15,000 limit and an 18-month promo term, you could roll your $10,000 in credit card balances onto it, which would bring the balance to $10,400 with a 4% balance transfer fee. Over the 18-month promo term, you would pay off $5,400 by maintaining your $300-per-month payment. 

Roll that remaining $5,000 onto another 18-month 0% balance transfer card, bringing it to $5,200 with the 4% fee and pay it off in just 18 months at the same $300 per month. 

Your total debt relief is massive in this instance, as you’ll be out of debt 236 months sooner and save nearly $28,000 in interest without increasing your monthly payment. Plus, you can modify this plan to fit your financial situation.

While those are huge savings, the downside is you never know if another 0% APR offer will come your way and allow you to roll the remaining balance over. Also, you may not have the credit score needed to get a 0% card.

Choose your debt relief program and get rolling 

There are many options to get the credit card debt relief you need, including debt consolidation, debt management, bankruptcy and even rolling your debt onto a 0% balance transfer card. The key is finding the debt solution that works best for your financial situation. In some cases, this may involve a combination of a few solutions, like a debt consolidation loan to pay off some debt and transferring the remainder onto a 0% card. 

No matter which program fits your financial situation best, debt relief is available. The key is to act now before your credit card debt worsens and interest charges start getting out of control. The sooner you get a debt relief plan in place and act on it, the quicker you'll be free of the burden of debt and back on track to financial freedom.