Best debt relief options for credit card debt
If you are struggling with credit card debt, you may feel overwhelmed and unsure how to find relief. You’re not alone. Because of high interest rates and compounding balances, credit card debt can be particularly daunting.
However, it’s possible to lift the burden of credit card debt. In this article, we’ll explore the best options for credit card debt relief and how to get you back on the road to financial freedom.
Here is an overview of what U.S. credit card debt looks like in numbers:
Key credit card debt statistics
As of the third quarter of 2023, Americans hold approximately $1.07 trillion in credit card debt.
The average credit card balance in the U.S. was $6,501 as of the third quarter of 2023, a 10% increase year over year.
The national average credit utilization ratio stands at 29%.
Generation X holds the highest average credit card debt with an average of $9,123.
Millennials’ credit card debt is increasing the most, at a rate of 15.4% in 2023.
Is credit card debt forgiveness an option?
When you’re on the edge of a financial cliff, the idea of having your debt forgiven may seem too good to be true. While your credit card company likely will not offer complete credit card debt forgiveness, there are other avenues to explore for debt relief.
Start by contacting your credit card company and find out if they have a credit card debt forgiveness program. Beware of companies that tout government-sponsored credit card debt forgiveness programs. There aren’t any government-backed credit card relief programs, so any claims otherwise are likely scams.
While you are unlikely to have the debt completely forgiven, it may be possible to work out a lower payment plan, have the company write off a portion of the debt or lower your interest rate for a set period.
Options for credit card debt relief
Complete credit card debt forgiveness will rarely be an option, but there are several ways to get your credit card debt under control.
Debt consolidation
Debt consolidation is a form of credit debt relief that involves combining multiple debts into a single monthly payment. This can be done through debt consolidation loans, balance transfer credit cards or enrolment in a debt management program.
Credit card debt consolidation involves streamlining the repayment process by combining some (or all) of your debts into one periodic payment. The aim is to secure a better interest rate and simplify your obligations. The process will generally involve taking out a new personal loan with a lower interest rate.
Debt consolidation is one of the best options for credit card debt relief, and not just because of the lower interest rates. It can help you pay off your debt faster and may even help your credit score in the long run if you stick to the payment plan. Just be aware that it may hurt your credit score in the short run.
Balance transfer credit cards offer another form of debt consolidation. In this scenario, you transfer your existing balances from high-interest cards to one new card with more favorable terms. It’s often possible to obtain an introductory 15- to 25-month zero-interest period during which you can pay off your credit card debt without any interest. The better your credit score, the longer the 0 percent APR period may be, so it’s a good idea to implement this option before you miss too many payments.
Pros of debt consolidation
Lower interest rates or reduced fees
Can help you pay off your credit card debt faster
Simplified management, with one monthly payment
Potential credit score improvement with on-time payments
Cons of debt consolidation
Approval may be an issue, especially if you don’t have a good credit score
Commitment to a long-term repayment plan
Loan fees add costs
Potential credit score damage when you open the loan, and especially if you miss payments
Debt settlement
Debt settlement entails negotiating with creditors to reduce the total debt amount owed by offering a lump sum payment. This usually entails funding an escrow account and offering to pay off a percentage of the debt in a lump sum of less than the amount you owe. While you can negotiate with your credit card company yourself, reputable nonprofit credit counseling agencies can also guide you through the process or negotiate on your behalf.
Credit counselors are not only useful to help you negotiate your debt settlement; they also offer educational and budgeting resources that can help you get out of debt and stay out of debt. Some for-profit companies also offer debt settlement programs. Make sure to research any company before you sign on because some companies claiming to help with debt are scams.
Because most companies will advise you to stop making payments while you negotiate, you might end up with additional late payment fees and lose points on your credit score. There is also no guarantee the credit card company will accept your debt settlement proposal, resulting in damage to your credit score without any benefit.
Pros of debt settlement
Potentially large reduction in total debt owed
Single point of contact for debt resolution
Possible faster repayment period
Avoid filing for bankruptcy
Cons of debt settlement
Negative impact on credit score
Fees associated with the debt settlement process, even if it is unsuccessful
Requirement to adhere to a structured repayment plan
No guarantee that the lender will accept the settlement proposal
Tax implications because canceled debt can be considered income
Bankruptcy
Bankruptcy is a legal process that provides relief from overwhelming debt by liquidating assets or creating a repayment plan. Chapter 7 bankruptcy is ideal for unsecured loans (such as credit card debt), while Chapter 13 bankruptcy may be best if you have certain assets you want to keep.
While bankruptcy is often seen as a measure of last resort it may be a viable option for those with insurmountable debt. If you aren’t able to consolidate your debts, bankruptcy might offer you some tangible benefits. The process involves court proceedings and procedural hurdles, but roughly 96% of Chapter 7 bankruptcy cases are successful in discharging debts.
The main upside of declaring bankruptcy is that you walk away with a court order that discharges you of the obligation to pay certain debts. While bankruptcy might provide relief and a fresh start, certain debts may be excluded, such as student loans, alimony and older tax debt. Bankruptcy will also have a major impact on your credit score for seven to 10 years.
Pros of bankruptcy
Potential discharge of certain debts
Protection from creditor lawsuits during bankruptcy proceedings
Certain property is exempt, meaning it can’t be sold to settle your debts
Cons of bankruptcy
Forced sale of assets to repay debts
Certain debts won’t be discharged
Significant impact on credit score
Alternative ways to get out of credit card debt
Aside from traditional debt relief options, there are alternative strategies to consider when trying to regain control of your credit card debt.
Financial counseling
Guidance from financial and credit counselors can provide valuable insights into budgeting, spending habits and debt-management strategies. This means that not only will you get out of debt, but you will also be equipped with the tools to stay out of debt.
Snowball or avalanche methods
Using debt repayment strategies like the debt snowball or debt avalanche methods can help you prioritize and steadily settle your credit card debt. The debt snowball method emphasizes paying off the smallest debts first, while the debt avalanche method prioritizes paying off the debts with the highest interest rates first.
In either case, you should keep making the minimum payments on your other debts while you prioritize one at a time.
Mistakes to avoid with debt relief
Certain pitfalls may exacerbate your financial challenges when looking for credit card debt relief. If you embark on a debt relief plan, avoid the following:
Debt relief scams: Some criminals target those seeking help with credit card debt. Make sure that you know how to identify a debt relief scam, such as guarantees that you will qualify for debt relief or that your credit score will be improved.
Hidden fees: Most credit card debt solutions will come with fees. It is important to make sure you know what they are so you don’t get blindsided by hidden costs.
Impulsive financial decisions: Try not to make impulsive financial decisions, which can further jeopardize your financial stability. Getting out of debt is a long-term process and it will take persistence to attain your financial freedom.
Nagging creditors: Ignoring communication from creditors can lead to escalated collection efforts, additional fees and damage to your credit score. However, that doesn’t mean you should allow debt collectors to harass you. The Fair Debt Collection Practices Act offers you protection if you are being harassed by debt collectors.
Predatory lenders: Avoid engaging with loan sharks offering high-interest loans that can trap you in a cycle of debt.
Next steps
Navigating credit card debt can be intimidating, but there are viable options for credit card debt relief. Whether you pursue debt consolidation, settlement or bankruptcy, understanding the pros and cons of each approach will help you make an informed decision. Additionally, exploring alternative strategies and avoiding common pitfalls can smooth out your journey to financial freedom.
The first step on your road to a debt-free life is to decide to take control of your credit card debt and explore the solutions available to you. If you’re unsure where to begin, a nonprofit credit counselor can help you assess your options.
