Credit Card Debt Relief: Benefits, Risks and Alternatives

Jessica Sain-Baird, Editor at LendingTree

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Struggling with credit card debt? You aren’t alone. Millions of Americans are shackled by high-interest credit card debt with no clear end in sight.

Credit card debt relief could be a solution, but it isn’t right for everyone. It’s only second to bankruptcy when it comes to credit score impact.

In this guide, we’ll teach you what credit card debt relief is, how it works, who it may be good for and whether an alternative might be a better choice.

Key takeaways

Credit card debt relief, also known as credit card debt settlement, is a process that can help you pay less credit card debt than you truly owe.
When you enroll in a debt relief program, you will stop making credit card payments. This will hurt your credit score.
Debt relief companies charge fees, usually 15% to 35% of the debt you enrolled.

What is credit card debt relief?

Credit card debt relief is a process that can help you pay less credit card debt than you actually owe. To do this, you’ll work with a debt relief (or debt settlement) company. Some companies report that successful settlements can result in savings of 15% to 35% after fees.

When you’re on a credit card debt relief program, you won’t pay your credit card bills. Instead, you’ll give the debt relief company a monthly payment to set aside. This is what the debt relief company will use to negotiate with your creditors.

If your settlement is successful, your credit card company will accept less than what you owe and forgive the balance. The idea is that the credit card company would rather accept a smaller payment than nothing at all.

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How credit card debt relief works

Evaluating credit card debt relief can feel heavy, but knowing how it works can make it less daunting. Here’s what you can expect if you enroll in a debt relief program:

Decide if debt relief is right for you.
Before pursuing debt relief, you need to make sure that you’re a good candidate. Generally, debt relief is typically best if you aren’t worried about damaging your credit score, aren’t ready for bankruptcy and can afford to pay some (but not all) of your credit card debt.
Enroll in a debt settlement program.
Assuming you researched and found a legit debt settlement company, it’s time to enroll in a program. Legally, debt relief companies can’t charge fees until they’ve settled your debt. The only fee you may have to pay at this stage is to set up and maintain your debt settlement bank account (also called an escrow).
Stop paying your credit card bills.
Instead of paying your credit card bills, you’ll give the money to the debt settlement company. It will put that money aside in your escrow account, which you will have complete control over. The faster you save, the quicker the debt relief company can start negotiations.
Wait as money builds in your debt settlement account.
Working a debt relief program can take a long time — typically 24 to 48 months. That’s a lot of missed payments. You can still be sued by debt collectors if you’re in a debt settlement program. Many debt relief companies offer legal services in case this happens.
The debt relief company negotiates.
Once your escrow account has reached a certain level, the debt relief company will attempt to negotiate a settlement. Not all credit companies will work with debt relief companies. Your debt relief company should have a good idea of which may be willing to negotiate, but results aren’t guaranteed.
If successful, pay fees and taxes.
When a debt relief company settles a debt, it will charge a fee. This fee varies by company, but 15% to 25% of the amount you requested to settle is standard. The company will deduct this from your escrow account. Also, you generally have to pay taxes on settled debt above $600 when it’s time to file.

Who qualifies for credit card debt relief?

Americans currently owe more than $1.209 trillion in debt, according to LendingTree’s credit card debt tracker. Although most anyone with overwhelming credit card debt can qualify for credit card debt relief, there are some qualifications you may have to meet. Debt relief companies look at:

The amount of debt you owe: You usually have a certain amount of debt before you can enroll. National Debt Relief accepts debt starting at $7,500. Others require higher, like Accredited Debt Relief’s $20,000 minimum.
The type of debt you owe: Only unsecured debt qualifies for debt relief. Most credit cards are unsecured (meaning they don’t require collateral), so this shouldn’t be an issue.
Your credit score: You can get debt relief with poor credit, but you may still have to meet a minimum requirement. This minimum is generally easy to meet, if the company has one.

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Who might benefit from credit card debt relief?

Before you enroll in a credit card debt relief program, ask yourself:

Do you have bad credit?
Will it take three or more years to pay off your credit cards?
Are you only able to afford minimum payments (if that)?

If you answered yes to all three, then you might be a candidate for debt relief. Otherwise, you may have better alternatives.

Risks of credit card debt relief

We’ve already touched on some of the risks that come with credit card debt relief. Here are the finer details.

Damaged credit score

Payment history makes up 35% of your FICO Score, making it the biggest factor to affect your score. Debt relief programs usually take years to complete, leading to years’ worth of missing credit card payments. This will drop your score.

Shows on credit report

Settled debt shows as “settled” on your credit report for up to seven years. This is a red flag for lenders, so it may be hard to get a new card or loan during that time.

Debt lawsuits

Enrolling in a debt relief program will not shield you from debt lawsuits. The longer debt sits unpaid, the more likely it is that either your original creditor or a third-party debt collector will sue you. If you ignore the lawsuit, you may find your wages garnished.

Interest and fees may outweigh savings

Interest compounds on a credit card when you carry a balance from month to month. Each day, your credit card company calculates the interest on your daily balance and adds it to your total. Most issuers also charge late fees.

So while you may be able to get some of your debt settled, your total amount of debt will probably balloon. Expect interest and fees to eat into your settlement. You might even end up owing more than what you saved.

No guarantee your creditors will negotiate

Your creditors don’t have to negotiate if they don’t want to. Although you won’t be on the hook for settlement fees, you may have stopped making payments and damaged your credit score for nothing.

Try the DIY method

You don’t have to hire a debt relief company to get out of debt — you can negotiate yourself. Be prepared to offer an amount. It may also help if you go over any hardships that caused you to fall behind (job loss, illness, etc.). Above all, be professional, be polite and keep a record of your conversation.

Debt relief scam warning signs

Although the Federal Trade Commission (FTC) strengthened debt relief regulations in 2010, debt relief scams are still a risk. Be cautious of companies that:

Charge upfront fees (this is illegal)
Say there is a government debt relief program for credit card debt (there’s not)
Overpromise or guarantee results
Cold call you

“Be wary of companies that offer huge promises,” says Matt Schulz, chief consumer finance analyst for LendingTree. “Nothing attracts scammers like people struggling with debt problems. If something sounds too good to be true, it probably is.”

Before choosing a debt relief company, see if it’s accredited by the Association for Consumer Debt Relief (ACDR). You can also check if the agent you’re working with is certified by the International Association of Professional Debt Arbitrators (IAPDA).

These nonprofit organizations help educate consumers about debt relief and set industry standards for debt relief companies.

Alternatives to credit card debt relief

Debt settlement isn’t the only debt relief option out there. Exhaust all avenues before settling your debt.

Credit card refinancing

Credit card refinancing may be best if you are juggling multiple credit cards and have strong credit.

Refinancing credit card debt requires you to take out a debt consolidation loan. Then, you will use this loan to pay off your credit cards. Credit card refinancing doesn’t change what you owe, but it can help you streamline your bills and potentially save you interest.

Debt consolidation loans are usually cheaper than credit cards when you have excellent credit. The average credit card interest rate is currently 24.35%. But LendingTree users with 720+ credit scores saw average personal loan rates of 17.18%.

Credit card balance transfer

A credit card balance transfer may be best if you have good credit and can pay off your credit card debt in a year to a year and a half.

Like credit card refinancing, a credit card balance transfer shifts your current debt from one spot to another. In this case, you will move multiple credit card balances to a single balance transfer credit card.

Balance transfer cards are specifically designed to absorb credit card debt. Many come with a 0% APR introductory period, but you typically need good credit to qualify. The most common intro period is 15 months, but some can be as long as 24 months. The goal is to pay off your debt by the time the intro period ends to avoid interest altogether.

Debt management plan

A debt management plan may be best if you want to change your spending habits and can pay off your debt in three to five years.

You can get a debt management plan (DMP) by going through credit counseling, which is typically nonprofit. You may have to pay a set up fee and a modest monthly fee for a debt management plan, but DMPs are generally seen as a healthy and inexpensive form of debt relief.

When on a DMP, a certified professional will come up with a repayment plan to get you out of debt within three to five years. They may also negotiate lower rates, monthly payments and fees with your creditors — but probably not how much you owe.

The U.S. Department of Justice maintains a database of approved credit counseling agencies. Find one near you to get started.

Bankruptcy

If you have a crushing amount of debt with no realistic way out, you may want to consider bankruptcy.

Despite its unnecessary stigma, bankruptcy can give a fresh start for those who really need it. Chapter 7 requires the filer to sell certain assets (if they have any, most don’t) and use the proceeds to pay off debt. Any eligible debt that is leftover is discharged, or forgiven.

Chapter 13 doesn’t require the filer to sell assets. Instead, the filer will agree to a three to five year repayment plan that will take up most of their disposable income. Leftover eligible debt is discharged.

Bankruptcy is not something to take lightly. Chapter 7 shows on a credit report for 10 years. For Chapter 13, it’s seven.

We urge you to speak with an attorney for personalized advice. You can find low-cost or pro bono legal aid through usa.gov.

Frequently asked questions

Credit card debt relief as a whole is not a scam, but it is risky. The process requires you to stop paying your credit cards, which will hurt your credit score. There’s also no guarantee that your credit card companies will settle.

Plus, if the debt relief company is successful, it will charge a fee between 15% to 25% of the amount of debt you enrolled. This will eat into your potential savings.

That said, debt relief can be a viable option if you’re overwhelmed with credit card debt, already have a poor score and don’t want to file for bankruptcy.

There are no government-sponsored debt relief programs. However, you could find debt relief by enrolling in a debt settlement program. If a company claims that it is affiliated with the government, it’s a scam.

You can legally get rid of credit card debt by enrolling in a debt relief program, by filing for bankruptcy or by negotiating with your creditors yourself.

Credit card refinancing, balance transfers or a debt management plan can help you pay less interest or get a lower monthly payment, but they won’t change the total amount of debt you owe.

No matter your situation, we’ll find the best solution together. Just a few clicks (or taps) away!

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