Credit Card Debt Relief and How It Can Help Save You Money
Borrowers who have accumulated a significant amount of credit card debt often look to debt forgiveness as an escape route. Debt forgiveness is when a borrower negotiates to reduce or eliminate their debt burden, and there are numerous avenues of forgiveness.
However, debt relief can also have downsides, and not everyone is eligible for forgiveness programs. Borrowers ineligible for forgiveness can avoid more extreme options like bankruptcy by employing strategies like balance transfers or consolidation. This article breaks down different debt forgiveness and relief options and helps you choose the one best suited for you.
What is Credit Card Debt Forgiveness and How Does it Work?
Credit card debt forgiveness is the practice of negotiating forgiveness for some, or all, of one’s credit card debt. Let’s take an example: say you have $10,000 in credit card debt and have not made a payment on it for 6 months. In this scenario, your credit card company will likely have sold your debt to a collection agency.
So, if you have missed half a year of payments, the collection agency may simply seek to obtain as much of that amount as possible, if they think that you will be unable to repay the entire debt. You can then negotiate with the collection agency and reduce your debt burden from $10,000 to $5,000, obtaining $5,000 in debt forgiveness.
Why You Should Act Quickly
However, dealing directly with your credit card company before you miss payments is much preferable to dealing with a collection agency. By contacting your credit card company early, you can avoid damage to your credit.
Credit card companies have hardship departments that can offer relief. For instance, many companies offer 12-month interest-free periods on your debt. This can give you some space to improve your finances and shield your credit score from further harm.
How Credit Counseling Can Help
Speaking with a credit counselor can help you develop an action plan for reducing or eliminating your debt. Credit counselors have detailed knowledge of relief and forgiveness options and can craft a debt management plan. By bringing a debt management plan constructed with a credit counselor to your credit card company, you can perhaps obtain a lower interest rate.
Seeking credit counseling does not damage your credit score, and does not have the drawbacks of other relief options like bankruptcy. Find a National Foundation for Credit Counseling-accredited organization and get a consultation.
Credit Card Relief Options
If outright debt forgiveness is not available to you, then the next best option is finding credit card relief. There are many different types of credit card relief, and the following section describes the three most prominent options in detail.
Do a Credit Card Balance Transfer
Balance transfer credit cards are credit cards that offer 0% APR on your credit balance. These cards typically have an introductory period of 0% APR, and the better your credit, the longer the interest-free period. You can simply apply for one of these cards and transfer your credit balance to the new card. Now, you have a period in which you can pay down your debt without accumulating any interest.
Enroll in a Debt Management Program
Creditors may be unwilling to negotiate relief with you, especially if you are already having difficulty making payments. Enlisting the help of debt management programs can give you more leverage when negotiating with creditors. With a debt management plan in hand from a credit counselor, creditors are typically more willing to strike a deal.
Consolidate Credit Card Debt with a Personal Loan
The interest rate on personal loans is typically much lower than credit cards, so interest accumulates more slowly on personal loans. A simple way that you can reduce your debt burden, then, is by taking out a personal loan and using those funds to pay off your credit balance. If you have good or excellent credit, you will qualify for lower interest rates for personal loans and save more.
Debt Relief Options to Avoid
The options listed above can help you reduce your debt burden without damaging your credit. Other options of debt relief like the ones listed below can provide more relief, but also have significant downsides.
Debt settlement is an extreme form of relief for individuals who cannot qualify for bankruptcy. With debt settlement, you cease making any payments on your cards and instead put this money into an account controlled by the debt settlement company. The company then approaches creditors as you lag behind on payments and negotiates with them in an attempt to settle.
This strategy takes advantage of creditors desperation, but it also destroys your credit and leaves you vulnerable to collection calls, penalties, and even lawsuits.
Bankruptcy is the most common choice for borrowers who could not make payments on a debt management plan. While bankruptcy wipes out your credit card debt, it also decimates your credit score, and it won’t necessarily get rid of all of your debt either.
How Credit Card Debt Relief Affects Your Credit
The consequence of credit card debt relief on your credit score depends on the type of relief you use. Options like a credit card balance transfer or consolidation with a personal loan should not harm your credit at all. Coordinating with a credit counselor and developing a debt management program also will not damage your credit.
The problem with debt settlement and bankruptcy is that, though they may provide relief from most or all of your debt, they will inflict grave damage on your credit score. Bankruptcy will stay on your credit report for ten years, and rebuilding your credit to a good or excellent level will likely take years as well.
Tax Consequences of Credit Card Debt Relief
Just as credit card balance transfers, consolidation, and debt management programs do not affect your credit score, these forms of debt relief should not affect your taxes either. However, debt forgiveness is a different story.
The IRS taxes credit card debt forgiveness the same as income, and the amounts forgiven must be reported to the IRS along with your income. Creditors who forgave more than $600 in debt will file a Form 1099-C, and you will have to file a form 1099 as well.
You should discuss your debt relief and forgiveness with a credit counselor so you know with certainty whether or not your canceled debt is taxable.
As you can see, while there are many options for debt relief and forgiveness, some are much more valuable than others. In terms of reducing your debt burden outright without damaging your credit score, consolidating with a personal loan is perhaps the best option. Find some lenders who offer personal loans for credit card debt consolidation and investigate their eligibility requirements. If you can qualify for an interest rate that is much lower than your credit card, you can pay off your credit card debt right away and wipe out a huge amount of debt from interest.