Getting into credit card debt is easy, but getting out of it can be a challenge. This difficulty compounds when you add a financial hardship, like job loss or divorce, into the mix.
Fortunately, many credit card issuers understand it’s in their best interest to keep you on the right path. As such, there are credit card hardship programs designed to prevent you from falling behind on payments.
Below, we’ll take a look at how these financial hardship programs work, some tips to getting approved for one and a few alternatives.
What’s a credit card hardship program?
While credit card companies aren’t in the business of helping you manage your debt, they are in the business of protecting against losses. When you fall way behind and stop making monthly payments, the credit card company will eventually write off the debt and sell it to a collections company for 4 to 7 cents on the dollar.
For instance, if you owed your credit card company $10,000 and never repaid it, the card issuer would likely recoup as much cash as it could by selling the bad debt to a collections company for $400-$700. That’s a loss of $9,300-$9,600.
To avoid this, a credit card company may offer a hardship program. Such programs can get you back on track with a payment you can afford, but they also help the credit card company mitigate its losses by making it easier for you to repay the debt.
Credit card hardship programs vary significantly from one company to the next, but they generally provide short-term debt-relief options, including:
- Lower interest rates
- Waived late fees
- Deferred payments
- Lower monthly payments
- Fixed debt repayment plans
- Debt settlement options
As a borrower, a credit card hardship program offers you a way to lower your payments and avoid falling behind. To the credit card company, it’s a way to collect more than it would’ve received from selling the debt to a collection agency.
It’s a win-win in many cases, but not everyone qualifies, and some credit card issuers don’t offer a hardship program.
What credit cards offer a hardship program?
Not every credit card company offers a hardship program, but many provide helpful solutions when you’re in need.
To find out if your credit card company offers a program, you typically have to contact the customer service department. A few of the more proactive credit card companies advertise their programs online, including Discover, Bank of America and American Express.
Tally also offers a comparable hardship program that provides the same short-term debt relief options. In this case, the program is related to a specific, widespread hardship — COVID-19 — but Tally and other lenders are often willing to help in many different situations.
The key is to contact your credit card issuer or other lending institution and start the conversation to find out if they offer a hardship program and what your options are.
How does a credit card hardship program work?
Credit card hardship programs vary by the company and your financial situation. That said, there are some specific steps to take when considering this path.
1. Review your budget
The first step to getting debt relief via a credit card hardship program is to thoroughly review your budget. Collect all your bills and other critical expenses like groceries, gas and utilities, then add them up.
Don’t forget to include less frequent payments, such as quarterly car insurance, and break them down into monthly chunks. This gives you an idea of how much money you need just to live. From there, add in your discretionary spending, including entertainment, dining out and other nonessential items.
Once you add up all these expenses, you’ll have a firm grasp on how much you spend monthly. Now subtract that total from your income and see where you land.
If you break even or have surplus cash, you likely don’t need or qualify for a credit card hardship program. But if you have a shortage of money, this may be the time to seek the help of a credit card hardship program.
2. Contact your credit card company
If you’ve fallen behind or are struggling to make your credit card payments, your first instinct may be to hide from your creditors. But your best bet is to contact them the moment you start struggling.
Call the customer service number on the back of your credit card and explain to the representative that you cannot afford to make your payments. Tell the representative you’re interested in a credit card hardship program, and they will let you know whether the credit card company offers one.
If there’s a solution for you, the representative will likely transfer you to a loss-mitigation or hardship department for further details.
3. Present your case for a credit card hardship program
Once you get on the phone with the hardship program team or the loss-mitigation team, it’s time to present your case. Let the representative know that you’ve reviewed your monthly budget, and you can’t afford your credit card payments without creating a financial hardship for yourself.
Outline any changes that thrust you into this financial hardship. Some examples that credit card companies accept include:
- Loss of a job
- Reduced income
- Unexpected expenses
- Death of a spouse
- Temporary disability or serious illness
- Natural disasters
There are numerous reasons your credit card company will consider a hardship program, but overspending or inaccurate budgeting are not acceptable. Also, your credit card company may want to see proof of qualifying changes before it’ll approve the hardship program.
4. Consider your hardship program options
If your credit card issuer determines you qualify for one of its hardship programs, the representative will present one or more options.
Your choices might range from something as simple as an interest rate reduction or waived late fees to something as significant as debt settlement. The options depend on the issuer’s available programs, your ability to pay, the amount of debt you owe and other variables.
Be sure to verify that the hardship program fits your budget and financial goals. You don’t want to jump into an agreement without first confirming you can afford the minimum payment.
If you need time to review the program and your budget, you can end the conversation with your credit card company, review the payment plan and call back to start the program. Once you find an option that matches your budget and goals, you may need to sign paperwork to make it official.
5. Fulfill the hardship program requirements
When you sign up for the hardship plan, there will be strict requirements. These generally include making a set payment every month for a fixed period without any hiccups. Some credit card companies may have other conditions, such as entering a debt management plan or speaking with a credit counselor regularly.
Ensure you meet every requirement during the plan. Failing to do so can result in the credit card company stopping the hardship program, thereby putting you back at square one.
What are the benefits of a credit card hardship program?
Admitting you’re in an economic predicament might be a shot to your financial ego, but there are plenty of benefits to these plans.
Save your credit score
The biggest benefit of a hardship plan is that it can save your credit. While your financial hardship may be difficult to confront, it’ll only become more dire if you start missing credit card payments and take a hit to your credit score. A hardship program, when executed correctly, can save you from missing payments and sending your credit score tumbling.
Get out of debt faster and cheaper
If your credit card issuer waives fees and reduces interest rates to help cardholders in financial distress, it can be a crucial long-term benefit. Not only will this reduce your monthly payment, but a lower interest rate and waived fees can also pull you out of debt quicker and save you cash.
Learn how to better manage money
Sometimes, learning by doing is the best way, and this rings true in personal finance. By exploring your budget and speaking with your credit card issuer about your hardship options, you can learn a lot about managing finances. Whether it’s a better understanding of interest rates or becoming a master budget maker, this can help set you up for future success.
What are the drawbacks of a credit card hardship program?
There are lots of benefits to a credit card hardship plan, but there are a few negatives to consider, too.
Your account may be closed
A credit card company doesn’t want to approve a hardship program only to have you rack up charges again. This is why some hardship plans include a temporary suspension of your account or, in some cases, a permanent account closure.
In either case, you will not have access to the credit card until you’ve fulfilled the terms of the hardship plan.
Negative impact on your credit score
While a hardship plan may have a long-term positive effect on your credit score, it can also have a short-term negative hit. This stems from the potential suspension or closure of the credit card account, which can harm your credit score in two ways.
First, if this is one of your older credit cards, its closure can shorten your length of credit history, which can reduce your credit score.
Second, once the credit card company closes the account, your available credit limit decreases, which will increase your credit usage ratio. Your credit usage ratio makes up 30% of your FICO credit score, so it can have a significant impact.
Are there alternatives to a credit card hardship program?
Credit card hardship agreements can be a big help when you’re in a financial bind with no apparent way out. However, other options might work out better in the long term.
0% balance transfer
Being in a financial bind doesn’t mean you have bad credit. If your credit score is still in good shape, you may qualify for a balance transfer credit card that offers a 0% balance transfer promotion for a year or longer. When a card offers this no-interest balance transfer, it can dramatically lower your monthly payment and give you the short-term relief you need.
For example, if you owe $5,000 on a card with a 27% interest rate, your monthly payment is likely around $162 per month — with only about $50 of that going toward the principal balance. If you move your balance to a 0% interest card, your payment could be as low as $50 per month. What’s more, 100% of that payment goes toward the balance.
Keep in mind, though, these balance transfers generally come with a 3%-4% fee per transfer.
Debt consolidation loan
Debt consolidation combines all your credit cards into one lower-interest personal loan. Depending on the terms, this loan may dramatically reduce your monthly payments and get you out of debt faster.
Make sure to check the terms, though. Many debt consolidation loans come with hefty origination fees and may cost you more in the long run.
Another option in the consolidation field is a line of credit, which Tally offers. The Tally line of credit often provides a lower interest rate than most credit cards. Plus, it’s a revolving account, so you can use it multiple times to pay off several credit cards.
Debt management program
Generally run by a nonprofit organization, a debt management program can work with all your credit cards and other debts to reduce your rates and monthly payments. So, instead of focusing on getting a hardship program from one credit card for relief, a debt management program can spread the relief over several debts. Although these are typically nonprofit, they often come with a small fee.
Now is the time to act
No matter which route you feel is the best for your financial situation, now is the time to make your move. Putting off contacting your credit card company about your inability to make your monthly payments only makes the situation more difficult and limits your options. Instead, take steps that best meet your needs so you can get closer to financial freedom.