Do credit card hardship programs really work?

Debt management plans If you're struggling to pay your credit card bills each month, getting help from a credit card hardship program may sound like the perfect solution. But getting into one and reaping the benefits are easier for some cardholders than others, and there are myriad factors that come into play. Still, it's an option many are turning to in these tough economic times: A Bank of America modified $10 billion in consumer credit last year alone.

WalletPop investigated these programs and found that while most of the major card issuers offer hardship programs, the terms and conditions can vary greatly. We also spoke with people who've been through the system like Kira Botkin (pictured right), to find out just how helpful -- or unhelpful -- these programs were for them.

What we found: Credit card hardship programs can be a lifesaver, but you need to know what you're getting into before you say "sign me up." Here's how these programs worked for Botkin and others.

Woman Who Barely Has Money for Food Seeks Mercy from Credit Card Issuers

For Kira Botkin, owner of a small web-based business in Columbus, Ohio, hardship programs were also a welcome respite from crushing debt. Botkin and her boyfriend purchased a house in 2008 that turned out to need expensive repairs; she was coming off a stretch of unemployment when her boyfriend lost his job, then his mother lost her home and moved in with the couple.

Forced to support all three of them and keep the roof over their heads in one piece, Botkin turned to her credit cards to the tune of about $40,000. Since she was employed at that point, she was able to scrape by, until the summer of 2009, when Chase raised its minimum payment to 5% of her balance from 2%. Botkin says she called Chase in a panic.

To her surprise, it suggested the hardship program. "I didn't even know this was a thing you could do," Botkin says. Chase then closed her two accounts, lowered both interest rates to 6% (it later reduced one to 2%) and put her on a five-year repayment plan.

Botkin's experience with Chase led her to call up her other creditors and tell them she was struggling to make her payments. "I figured, what do I have to lose? I just said I couldn't afford my payments. At that point, we literally did not have cash left over for food," she says. Both Bank of America and Discover lowered her interest rates, she says, although the Discover program was for a much more limited time frame and it only dropped her rate from around 15% to about 10%.

Today, Botkin says the $25,000 in debt she racked up on two of her cards is now down to $17,000.

Sinking Shopkeeper Discovers Some Relief

For Jon Deleeuw, there seemed to be no other alternative. Deleeuw, who has owned a card and gift shop in Seattle for five years, used credit cards -- mostly personal ones -- to keep his business afloat as the economy sank. Earlier this year, Deleeuw settled $68,000 in credit card debt with Bank of America, but he admits he'd tapped every source of savings by that point and still had ballooning bills. That's when he reached out to Discover regarding a card on which he was in default and owed about $5,000.

"I told them my business was off 65%," he recalls. "They asked how much I'm taking home, if I think it's gong to turn around and when. I say I think I'm going to be struggling for another year," Deleeuw says. From that conversation came the relief he was seeking: Discover knocked his credit card's interest rate down to 7% (from around 26%) and offered to waive late fees.

Deleeuw says the plan required that he set up his payments on an auto-bill system that would take them right out of his checking account on the due date, a common precondition for enrollment in a hardship plan. And he's reaching out to another creditor, U.S. Bank, to find out if he can ease the pain of paying back the $13,000 he owes them by enrolling in its hardship program.

How Credit Card Hardship Programs Work

While many of the banks WalletPop contacted say they reduce the actual amount owed in certain cases, it appears (form our interviews) that it's more common for customers to be offered an interest rate reduction. "They're certainly not going to start by reducing the principal," confirms Ruth Susswein, deputy director of national priorities at nonprofit group Consumer Action.

In some cases, an interest rate reduction might just do the trick: If you've fallen behind and are paying a default rate of around 30%, having that dropped to a more manageable 10% -- or even less -- can be a lifeline in hard times. But Susswein suggests asking about a principal reduction anyway, especially if what the company offers you is still more than you can afford each month.

All the issuers we contacted said customers can reach someone who can evaluate them for that bank's hardship program by calling the number on the back of their card. Be aware, though, that some don't refer to it as a "hardship program," advises Susswein. Your best bet is just to say that you're struggling to make your payments and would like to talk to someone who can help you out. A spokeswoman from BB&T Bank also suggested that a cardholder whose account is already in default also contact the collections department.

Before you call, make a rough budget of your expenses, including living expenses like your mortgage or rent, utilities, food and gas. Also tally up your other credit card bills. It's very important, experts say, not to promise more than you can deliver. If you're offered a payment that's still too high, be honest and let the bank know. If you get enrolled in a hardship program and agree to make those payments, failing to do so makes it unlikely that you'll get a second chance.

What to Look Out For

Be wary of offers to lower your minimum payment without a corresponding reduction in interest rates, says Aimee O'Brien, a training specialist at credit counseling group GreenPath Debt Solutions. It might seem as if the debt is off your back, but when the program expires, you'll owe even more.

Speaking of expiration, a word about program terms: Some are short-term, some last for a year or so, a rare few (such as Botkin's) are five-year plans. A Chase spokeswoman told us that its hardship-related interest rate reductions can go for up to five years. Some banks' programs require you to call and re-enroll after a certain time frame.

None of the banks WalletPop heard from say they require customers to be behind on their payments before they'll consider a hardship request, so don't make the mistake of thinking that not paying those bills will make it easier to negotiate. Don't deliberately default, warns O'Brien. If the hardship program turns you down or doesn't work out, having accounts in default limits your other options, she says.

The biggest variation among the banks we contacted pertain to how your participation in a hardship program shows up on your credit report. Some will indicate that you're enrolled in such a program and while this doesn't effect your FICO score, it would undoubtedly be a red flag for a lender if you tried to get credit while in a hardship program.

You'll want to ask if the bank will be making any special notation that gets sent to the bureaus. Since many banks will make you close the account if you want to join a hardship program, you need to ask how that closed account will be handled. (Discover is one of the few issuers we found that doesn't automatically close a card as a prerequisite for program participation.) In some cases, they'll note it as "closed by consumer," which is fine. Ask if they'll be willing to designate the closure that way, because the alternative -- "revoked" or "closed by Bank X" -- also looks like a red flag to would-be lenders.

SuccessIsn't Guaranteed

Cheryl, a social worker in Maryland, didn't have as much luck as Deleeuw and Botkin when she called Chase and M&T Bank looking for some relief in 2009. Deleeuw had taken a year off from her career as a social worker and found reentering the job market in 2008 to be a challenge. In the interim, her credit card debts piled up. When she contacted the banks begging for relief from her 29.99% interest rates, she says she was told she didn't qualify for the hardship program or an interest rate reduction because she didn't earn enough money.

Cheryl, who didn't want her last name used, says she struggled for another six months to pay her debts, then called back and lied about her income (inflating it so it would seem she earned more), which got her into programs that lowered her rates from 29% to 9% each. She was told each program was only for a year, but she says M&T Bank hasn't raised her rate yet, and she's afraid that calling them to ask about her participation in the program will lead to her rate going up. She's kept current on that account but admits she missed payments to Chase, which has led to her rate going up to 18%. When WalletPop asked Chase about this, a spokeswoman said via email that some people who are in too deep with their debts may be referred to a credit counselor instead of being given access to the hardship program.

For people like Cheryl, a debt management plan created by a nonprofit credit counseling service is a better option, says GreenPath's O'Brien. Hardship programs work most effectively for people who have a temporary problem paying their bills, she adds. If your troubles are more entrenched (if you're permanently disabled, for instance), stopgap measures might not be enough to keep you out of your debt cycle.
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