Debt Relief: A Step-by-Step Guide to Find Stability
Stop struggling and getting nowhere! These solutions help you take control.
In a perfect world, debt problems could be solved simply by tightening your belt for a few months and focusing your budget. Unfortunately, often debt problems are simply too big to handle using traditional payment methods. As a result, you pay and you pay month after month, but your balances never seem to go down.
It’s time to find a better way forward.
What is debt relief?
Debt relief refers to any alternate payment option that allows you to pay back what you owe in a more manageable way. The goal is to get to zero with as little hassle and damage to your credit as possible. That way you can avoid bankruptcy and regain stability.
To relief, the solution you use has to do at least one of these things:
- Reduce the interest rate applied to your debt
- Remove penalties and fees
- Lower your monthly payments
- Accelerate how quickly you can pay off your debt
The more of those things you can accomplish with a single debt relief option, the better. If you can find a solution that provides all of those benefits, you know you’re on the right track.
5 options for credit card debt relief
Option 1: Interest rate negotiation
The first option for debt relief is something you can do on your own. You contact one or more of your creditors to negotiate a lower interest rate on each debt.
How does this help? Lower APR means that less of each payment you make gets eaten up by interest charges. Each month your debt accrues interest charges based on its APR. If you lower the APR, then you eliminate the actual debt (principal) faster.
When does it work? In general, you need good credit score and a solid payment history with each creditor you contact. In other words, if you’re a good customer who always pays on time, you have a higher chance of success.
Another variation: If you missed a payment due to extenuating circumstances, you can contact your creditor to negotiate for penalty removal. Again, your chances of success are better if you’ve paid diligently in the past.
Option 2: Credit card balance transfer
The second option for relief is also do-it-yourself. You transfer the balances from your existing credit cards to a new card. The new card typically has a 0% APR introductory period ranging from 6-24 months.
How does this help? Transferring the balances means you have a certain number of months to pay off your debt interest-free. That means 100% of every payment you make is used to eliminate the debt. This can greatly accelerate how quickly a debt can be eliminated.
When does it work? A high credit score is a must. The higher your score, the longer the introductory period you can qualify to receive. That means more months where you don’t have to pay interest charges. This works when you have an amount of debt you can eliminate in-full within the introductory period.
Option 3: Personal debt consolidation loan
Credit cards are notorious for high interest charges; by comparison, interest rates on loans are much lower. With this option, you take out an unsecured personal loan and use the money to pay off your credit cards. This leaves only the loan to pay off, consolidating your debt at a lower interest rate.
How does this help? Consolidating credit card debt with a loan solves a few problems. It often significantly lowers the interest rate applied to your debt. It also provides fixed payments that are easy to manage in your budget.
When does it work? Good credit is still crucial here. A high credit score means a lower interest rate and a better chance you can get a loan large enough to pay off all of your debt. Ideally, you want to aim for a loan term of 5 years or less with an interest rate of 10% or less.
Option 4: Debt management program
This is a form of “assisted” debt consolidation. You enroll in the program through a credit counseling agency. They help you find a payment that works for your budget; then they negotiate with your creditors to lower your interest rates. You make one payment every month to the agency and they distribute that payment to your creditors.
How does this help? Since the credit counseling agency represents you, you can get low interest rates even with bad credit. Your counselor also helps you work out a budget to ensure the payment will really work for your budget. They can also negotiate to stop penalties and fees. You pay back everything you owe; you just do it in a more manageable way. As a result, this also helps avoid additional credit damage.
When does it work? If you can’t consolidate on your own and negotiation with your creditors failed, call a credit counseling agency! If you qualify for the program, they can do both of those things for you. As long as you have income to make a payment every month, this is usually a viable option.
Option 5: Debt settlement
This is essentially a last resort before bankruptcy. In this case, you settle your debt for less than the full amount owed. Generally, you make a lump-sum payment that equals out to a certain percentage of your total debt. In exchange, the creditor discharges the remaining balance.
How does this help? If you can get the creditor to agree then you can get out of a debt for less than what you owe. It’s actually similar to the partial payment schedule that you establish during Chapter 13 bankruptcy. The difference here is that you can do this with a single debt, which might give you the relief you need to pay your other debts bank in-full.
When does this work? This typically only works with debts in collections; after multiple attempts to collect the full balance owed, they may agree to take a percentage. However, you usually have to make a lump-sum payment. This can be difficult to generate if you’re already in financial distress. And settlement programs can be risky. Even in a best case scenario this causes significant credit damage.
10 essential tips to follow as you seek debt relief
- Always check two costs when considering a relief option:
- Monthly cost – can it work for your budget?
- Total cost – are you paying more overall to pay less each month?
- Do-it-yourself debt relief only works if you have a good credit score. If you have bad credit, save yourself some time and hassle by call a credit counselor immediately.
- A good debt relief plan should take 5 years or less. If you can’t complete your relief plan within 60 payments, look for another option.
- Lower APR is always better. If you qualify for a debt consolidation loan at 11% APR, talk to a credit counselor to see if they can negotiate lower rates. In some cases, the can get your creditors to eliminate interest charges completely. Then compare and decide.
- Make sure the payments work for your budget. If you can barely make the payments on a relief plan, it may not be the right option. One unexpected expense or emergency could send your budget over the edge again. You need breathing room!
- Anything but settlement will usually be good for your credit. As long as you pay back everything you owe, you typically won’t damage your credit. People often think that using another means to pay automatically means it’s bad for your credit. That’s just not true, even with a debt management program.
- Stop charging! No matter which option you choose for relief, you need to stop using your cards as you work through it. Otherwise, you add to your debt and make it that much harder to eliminate.
- Review your credit report once you’re done. You want to make sure that your credit report reflects the eliminated balances. You also want to ensure there are no negative items added. Go to com to get your reports for free.
- Re-do your budget once your debt is eliminated. You don’t want to go right back into debt once you get out. Make sure your budget covers all of your bills and regular expenses with room for saving. This will help break any dependence you have on credit cards.
- If one method fails, you can always re-consolidate. Nothing is set in stone. If you transfer balances and run out of time, you can use a loan or enroll in a debt management program. So if something isn’t working, move on to another option.
Additional Resources for Relief
Finding relief for other types of debt
Debt relief is not limited to credit card debt. You can find relief from other types of debt if another source is to blame for your financial distress. As with credit card debt, the form of relief you use depends on the type of debt causing the problem and your overall financial situation.
Here’s a short list of forms of debt relief for other types of debt:
- Deferment / forbearance: With these two relief options the goal is to reduce or suspend the monthly payment schedule. You negotiate with an individual creditor to pause the regular payment schedule while you work through a period of financial distress.
- Refinancing: This option focuses on reduce the interest rate applied to your debt. This cuts the overall cost of repaying the debt. In some cases, this will also reduce your monthly payment requirement.
- Modification: This is where you change the terms of the loan. Depending on the situation, you can modify the loan amount, as well as extend or reduce the length of the loan. You may also change from an adjustable interest rate to a fixed interest rate.
- Consolidation / repayment plan: Both relief plans allow you to roll multiple debts into a single monthly payment. It simplifies your repayment schedule and may reduce the monthly payment and interest rate.
- Settlement: This is the most credit-damaging form of debt relief. You settle your debt for less than the full amount owed; you only pay back a portion of what you borrowed. This should only be used as a last resort before bankruptcy.
- Forgiveness: This is a unique form of debt relief where the remaining balance on a debt is discharged without penalties. You must meet certain eligibility requirements to qualify. This is relatively rare and only applies to specific types of debt in certain circumstances.
We have a helpful chart that shows the differences between these programs. Debt Relief Programs Compared also shows you which types of debt you can use with each solution.
What to look for when choosing a debt relief company
In most cases, there is not a single company that you can work with that provides every debt solution available. You chose a provider based on which option you decide to use. You can also work with a credit or financial counselor, who helps you identify the right option. Then they can refer you to a provider of that service.
When choosing any relief service provider, always look for the following:
- Make sure to check the company’s Better Business Bureau rating
- Review the plan thoroughly and avoid any company that charges fees before they perform any part of the service.
- Always check independent third-party reviews, instead of reviews a company gives you or displays on their website.
Still not sure how to get the relief you need?
Speak with a certified credit counselor to get a personal debt and budget evaluation. One of our experts can help you hone in on the right solution or combination of solutions for your situation. Even if we can’t help you directly we can point you in the right direction; in many cases, we can refer you to a qualified provider. Call or complete an online application to request a confidential debt analysis today.