What Is a Hardship Program? How It Works and How It Can Help You
Call your credit card company before the collection calls start.
Contributing Writer at Tally
August 18, 2022
It’s usually easier to get into debt than get out of it. This difficulty compounds when you add a financial hardship, like job loss or divorce, into the mix.
Many credit card issuers and lenders understand it's in their best interest to keep you on the path to repayment, so they offer hardship programs to prevent you from falling behind on payments.
Below, we'll take a look at:
What is a hardship program
How these programs work
Some tips for getting approved for one and a few alternatives
What is a hardship program?
While credit card companies and lenders aren't in the business of helping manage debt, they are in the business of protecting against losses. When you fall behind and stop making monthly payments, the credit card company or lender will eventually write off the debt and sell the debt to a collections company for 4 to 7 cents on the dollar.
For instance, if you owed your creditor $10,000 and never repaid it, the card issuer would likely try to recoup as much cash as possible by selling the bad debt to a collections company for $400-$700. That's a loss of $9,300-$9,600.
A creditor may offer a hardship program to avoid such a sizable loss. This program can get you back on track with a payment amount you can afford. It can also help the credit card company or lender mitigate its losses by making it easier for you to repay the debt.
Lender and credit card hardship programs vary significantly from one company to the next, but they generally provide short-term debt-relief options, including:
Waived late fees
Lower monthly payments
Fixed debt repayment plans
Debt settlement options
As a borrower, a hardship program offers you a way to lower your payments, avoid falling behind and get back to making on-time payments to the creditor. To the creditor, 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 and lenders don’t offer hardship programs.
What creditors offer a hardship program?
Not every creditor offers a hardship program, but many provide solutions when you're in need.
Contact the customer service department to determine if your credit card company or lender offers a program. A few companies refer to their programs online, including Discover, Bank of America and American Express, but offer very few details.
The key is to contact your credit card issuer or lender and start the conversation as soon as possible to learn about their hardship options.
Who qualifies for a hardship program?
Part of understanding what a hardship program is involves knowing what qualifies you for one.
A lender may offer you a spot in its credit card hardship program for many reasons. However, no concrete rules define financial hardship in the creditor’s eyes. Some examples of situations that may qualify you for a hardship program:
These are only a few situations that could qualify you for a credit card hardship program. Contact your creditor to see if you qualify.
How does a hardship program work?
Lender and credit card hardship programs vary by the company and your financial situation. These five steps can help you apply for, qualify for and complete a hardship program.
1. Review your budget
The first step to getting debt relief via a hardship program is thoroughly reviewing your budget. Collect all your bills and figure out monthly expenses like groceries, gasoline, child care, and more. Then add them up.
Don't forget to include less frequent payments, such as quarterly car insurance bills, 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 monthly income and see where you land.
If you break even or have surplus cash, you may not qualify for a hardship program. But if you have a budget shortage, this may be the time to seek the help of a credit card hardship program.
2. Contact your credit card company or lender
If you've fallen behind or are struggling to make your loan or 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 or loan statement and explain to the representative that you cannot afford to make your payments. Tell the representative you're interested in a hardship program, and they will let you know whether the 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 hardship program
Once you get on the phone with the hardship program or loss mitigation team, it’s time to present your case. Let the representative know you've reviewed your monthly budget and can't afford your loan or credit card payments without creating a financial hardship for yourself.
Outline changes that may have led to this financial hardship. Lenders often accept:
Loss of a job
Death of a spouse
Temporary disability or serious illness
Your credit card company will consider a hardship program for numerous reasons, but overspending or inaccurate budgeting will not be acceptable. Also, your lender may want to see proof of any qualifying changes before approving the hardship program. Some lenders may also require you to write a financial hardship letter and mail or fax it to the hardship department.
4. Consider your hardship program options
If your lender or 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 solutions as simple as an interest rate reduction or waived late fees to something as significant as debt settlement — settling your debt for less than you owe. The options depend on the issuer’s available programs, your ability to pay, the amount of debt you owe and other variables.
Verify that the creditor's hardship program fits your budget and financial abilities. You don’t want to enter an agreement without 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 lender or credit card company, review the payment plan and call back to start the program.
Some creditors will provide only one hardship option, whereas others may offer multiple options. 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 a hardship plan, the lender will have strict requirements. These generally include making monthly payments for a fixed period without any hiccups. Some credit card companies may have other conditions, such as entering a debt management plan or having regular meetings with a credit counselor.
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.
After satisfying all the requirements, you’ll complete the hardship program. This means your account will be up to date and in good standing with your creditor. Once you complete the program, you’ll return to your previous account terms — regarding monthly payments, fees, interest rates, etc.
What are the benefits of a credit card hardship program?
Admitting you’re in an economic predicament might be a hit to your financial ego, but these plans have plenty of benefits.
Save your credit score
The biggest benefit of a hardship plan is it can save your credit. While your financial hardship may be difficult to confront, it'll only become direr if you start missing credit card payments and take a hit to your credit score. When executed correctly, a hardship program can save you from missing payments and sending your credit score tumbling.
Get out of debt faster and cheaper
You’ll see long-term benefits if your credit card issuer waives fees and reduces interest rates to help cardholders in financial distress. Not only will this reduce your monthly payment, but a lower interest rate and waived fees can help to pull you out of debt quicker and save you cash.
Learn how to manage money better
Sometimes, learning by doing is the best way, which is true in personal finance. You can learn a lot about managing finances by exploring your budget and speaking with your credit card issuer about your hardship options. Whether it's acquiring 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?
Hardship plans offer many benefits, but there are a few negatives to consider, too:
Lender may close your account
A credit card company doesn’t want to approve a hardship program only to have you rack up charges. 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 assistance program.
Negative impact on your credit score
While a hardship plan may have a long-term positive effect on your credit score, it can also be a short-term negative mark on your credit report. This stems from the potential suspension or closure of your credit card account, which can harm your credit score in two ways.
First, if this is one of your older credit accounts, closing it may slow your credit history’s aging and reduce your average account age. This can lead to a slight score reduction.
Second, once the credit card company closes the account, your total available credit limit decreases, increasing your credit utilization ratio. Your credit utilization ratio makes up 30% of your FICO credit score, so an account closure can significantly impact your score. For example, if you have two cards with a $1,000 credit limit and a $500 balance on one card, your utilization rate would be 25% ($500 / $2,000 = 0.25). If you closed the card with a $0 balance, your credit utilization would rise to 50% ($500 / $1,000 = 0.50).
Are there alternatives to a credit card hardship program?
When researching what a hardship program is, you may also consider the various alternatives available. These options might work out better than a hardship program 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. This no-interest balance transfer can dramatically lower your monthly payment and give you the short-term debt relief you need.
For example, you owe $5,000 on a card with a 27% interest rate. Your monthly payment is likely around $162 per month — only about $50 is going toward the principal balance. If you move your balance to a 0% interest card, your monthly payment could be as low as $50. Moreover, 100% of that payment goes toward reducing the balance.
Remember that 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.
Debt management program
Various nonprofit organizations and credit counseling agencies offer debt management programs that work with all your credit cards and other debts, such as medical bills, private student loans, utility bills and more, to reduce your rates and monthly payments. Instead of getting a hardship program from only one credit card, a debt management program can spread relief over several debts. Although these are typically nonprofit credit counselors, they often charge a small fee.
Now is the time to act
If you’re wondering what is a hardship program, this may indicate you’re having or potentially nearing financial difficulties. If so, now is the time to make your move.
Putting off contacting your credit card company about your inability to make monthly payments only makes the situation more difficult and limits your options. Instead, take steps that best meet your needs to get closer to financial freedom.
If your credit card bills are piling up and leading you toward financial distress, the Tally†credit card debt repayment app may be able to help. The Tally app helps manage your credit card payments and offers a lower-interest personal line of credit that allows you to efficiently pay off higher-interest credit cards.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.