No, there are no government programs that help consumers with credit card and personal loan debt. Student loan debt is another story, but beware — the landscape is rife with scammers and bad actors. For more information, review the U.S. Department of Education’s advice on avoiding student loan scams.
What Is Debt Relief?
Debt relief could reduce the amount you owe, lower your current interest rates — or do both.
Published on:
July 30, 2024
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Types of debt relief
Debt relief comes with risks. A misstep could cost you money (and your credit score). We’ve outlined some of the most popular paths to debt relief below. Review them carefully, and find the option that makes the most sense for you.
Debt consolidation loan
Who it’s for: Borrowers with multiple credit cards who can afford their current debt and have solid credit.
What it does: Streamlines your current debt into one monthly bill, hopefully with a better rate.
What’s the risk: If you don’t change your spending habits after consolidating, you may end up digging yourself further into the hole. Some lenders also charge origination fees up to 12.00%. An origination fee is an upfront fee that the lender will deduct from your loan before sending it to you.
Say goodbye to juggling credit card bills, and say hello to a single loan payment.
Debt consolidation doesn’t change how much you owe. Instead, you’ll take out one new debt (a debt consolidation loan) and use it to pay off your credit cards. Then, instead of making multiple credit card payments each month, you’ll only need to pay your consolidation loan.
Compared to credit cards, you might also pay less overall interest on a debt consolidation loan if you have excellent credit. At the time of this writing, LendingTree’s monthly credit card study shows the average credit card annual percentage rate (APR) is 24.84%. Debt consolidation loans, on the other hand, have an average APR of 18.66% (for credit scores 720 and up).
Balance transfer credit card
Who it’s for: Borrowers with multiple credit cards and can afford to pay their debt in six to 21 months.
What it does: Helps you pay less (or no) interest by moving multiple credit card debts to a balance transfer credit card.
What’s the risk: Interest rates can be steep after the introductory period. Also, balance transfer cards usually charge a balance transfer fee between 3.00% and 5.00% of the amount you transferred.
Like debt consolidation loans, balance transfer cards reorganize (not reduce) your debt. With this option, you’ll shift your current credit card debt to a balance transfer credit card.
Balance transfer cards come with an introductory period that typically spans between six and 21 months. During this time, the card issuer will charge a reduced APR. As long as you pay off your balance during the introductory period, you’ll skip interest altogether with a 0% APR balance transfer card.
It’s essential to have a plan to pay off your balance transfer card during the introductory period. Any remaining balance after your intro period could be subject to an APR of nearly 30.00% (or higher).
Credit counseling
Who it’s for: Borrowers who are ready to examine and change the spending habits that got them into debt in the first place.
What it does: A certified credit counselor will help you come up with a realistic budget. They may also negotiate lower interest rates with your creditors if you agree to a debt management plan. You’ll probably still be responsible for all of your debt.
What’s the risk: Some debt management plans have small start-up costs and monthly maintenance fees. You also can’t use your credit cards if you include them as part of a debt management plan.
A credit counselor is a certified professional trained to help overwhelmed borrowers navigate debt. During your sessions, your counselor will create a budget and help you adopt habits to pay your debt faster.
You could take it one step further and opt for a debt management plan (DMP). A DMP could help you become debt-free in three to five years. Your credit counselor will work with your creditors by asking them to lower your interest rates or extend your loan term.
Debt settlement
Who it’s for: Borrowers with a moderate amount of debt they can’t afford, but don’t want to file for bankruptcy. You should only consider debt settlement if you already have bad credit.
What it does: If you can get your creditor to agree, you might be able to get your debts reduced or eliminated.
What’s the risk: Not all lenders and credit card companies are willing to negotiate. Even if yours is, debt settlement may cost you more than what you get settled. Your credit could tank in the process, too.
Debt settlement could help you get part of your debt forgiven (or settled). To do this, either you or a debt settlement company will negotiate with your creditors. In theory, your creditor might be willing to reduce your total debt in exchange for a lump sum payment.
Most debt settlement companies will only work with you if you have a minimum of $7,500 in debt. And out of all the debt relief options on this list, debt settlement is the riskiest.
- Your creditors might refuse to negotiate. Hiring a debt settlement company is a waste of money if your credit card companies aren’t willing to work with you.
- You might fall for a scam. Many debt settlement companies overpromise, overcharge and underdeliver. These shady companies charge large upfront fees, with no plans of holding up their end of the bargain. Before hiring a debt settlement company, check the Consumer Financial Protection Bureau’s complaint database for concerning comments.
- Your credit score could tank. To get your creditor on board, you’ll likely have to pay your creditor a sizable chunk of money (albeit less than what you owe). Some debt relief companies encourage their clients to stop paying their credit cards to save for this lump sum. One missed payment can drop your credit score by more than 100 points.
- The cost may outweigh the benefits. Interest and late fees will continue to accrue if you stop paying your credit cards. And if you’re successful, settled debt is taxed as regular income. Finally, debt settlement companies typically charge a fee between 15% and 25% of the total debt it settled.
Bankruptcy
Who it’s for: Borrowers with debt that they are certain they cannot pay.
What it does: Eliminates some or all of your debt through court proceedings.
What’s the risk: You may be forced to sell valuable assets or follow a strict payment schedule that’s years long. You must also be at peace with ruined credit for quite some time.
Only turn to bankruptcy as a last resort. It can provide a much-needed fresh start if you’re in over your head. Still, the consequences of bankruptcy are harsh, so you need to know what you’re getting into.
With Chapter 7 bankruptcy, you may have to sell certain personal possessions and use the proceeds to pay off eligible debt. You won’t have to sell anything under Chapter 13 bankruptcy. Instead, you must put all of your disposable income toward your debt for three to five years.
Frequently asked questions
It could be, but temper your expectations. After debt settlement fees, interest charges, late payment fees and taxes, you might only see your debt reduced by 20.00%. Consider whether your credit score is worth your potential savings.
Debt settlement often requires you to stop making credit card payments. You will still get collections calls, and you might get sued by debt collectors. Also, settled debt shows as “settled” on your credit report for up to seven years. Lenders view this negatively and may raise APRs (or deny you) for future loans.
Sometimes. Unfortunately, there are scam debt relief services out there looking to take advantage of folks in desperate situations. Be on high alert if the debt relief company:
- Cold calls you for a sale
- Asks for money up front before providing service (this is illegal)
- Promises to settle all of your debts without assessing your situation
- Claims to have access to a government debt relief program