Credit Card Debt Relief Options For Dummies

credit cards cut up with billsMost people can get through tough financial situations by just tightening their belts and budgeting accordingly. But, there are times where debt is too big to handle by simply cutting back on things here and there. When bills start to get out of control, it’s time to think about debt relief options. There are many ways to relieve some of your debt. Unless you have a degree in finance or law, some choices can seem overwhelming, expensive, and complicated. To help you understand how to manage your charge card bills, we’ve outlined several credit card debt relief options for dummies.

When reading the details of all options below, it’s important to consider carefully. If you choose the right solution for your situation, you will be able to get your finances back on track. On the other hand, if you choose the wrong choice, you may end up filing for bankruptcy instead of managing your credit card debt.

Make a Budget

Many people struggle with monthly bills but don’t know how much money they owe on credit cards or how much they can truly afford to pay every month. When you are ready to get your finances under control, the first thing you need to do is make a budget. The first step in making a budget is listing your monthly income from all sources.

Once you know how much money you have going to the bank every month, you need to know how much you pay in fixed expenses. Fixed costs are the bills that are the same every month. For example, mortgage, rent, car payment, and health insurance costs are all example of fixed expenses.

Next, you need to list varying expenses. Groceries, clothes, and entertainment are all good examples of expenses that change from one month to the next. It’s important to write down all your bills, even the small ones, when you’re trying to track your spending patterns. It also lets you track expenses and prioritize what you must spend in comparison to what you do spend.
The goal when completing a budget is to know exactly where your money goes every month. Doing this allows you to find money you don’t know you’re wasting and enabling you to put that money to better use by paying down your debt.

Call Your Credit Card Companies

The first thing you need to do when you’re having trouble paying your credit card bills is to call the company. Reputable creditors don’t want their customers to fall behind on payments. For this reason, they will often offer you several options that allow you to modify payments without getting farther behind.

Negotiating Credit Card Interest Rates

The first credit card debt relief option you should consider includes negotiating credit card interest rates. What this entails is requesting lower interest rates from your creditors to ease your monthly burden. For some people, merely reducing the interest rate is enough to help them manage their debt better. If you opt to do this yourself, you will likely need a strong repayment history and an excellent credit rating to be successful.

Credit Card Balance Transfers

Another option to reducing credit card debt is a balance transfer. But this can be tricky and usually only a good idea if you’ve been unable to have your interest rates reduced. To complete a balance transfer, you’ll want to transfer the balances on your high-interest cards and move them to a different credit card with a substantially lower interest rate. By reducing the interest on your date, you can lower your monthly payment amount. It also makes it easier to budget because you’ll only have to make one payment every month. The only thing you need to watch out for is high balance transfer fees. Fees for this service are outlined in your credit card contract. It’s important to understand these charges and to do the math to make sure a balance transfer would help your financial situation.

Credit Counseling

If you’re reluctant or have tried and failed to negotiate with creditors on your own, you may want to consider credit counseling. Reputable credit counseling agencies will help you manage your money, debt, and budget. Most organizations offer free education materials, workshops, and low-cost or free credit counseling to help you ease your financial burdens.

When considering a credit counselor, you should choose one that is certified and trained to assist people in desperate financial situations. During a credit counseling session, a counselor will help you develop a unique plan that will offer solutions to your financial woes. The initial session usually takes about an hour, and follow-up meetings should be expected.

Debt Consolidation Loan

A debt consolidation loan works in the same manner as a balance transfer. What it entails is taking all your existing credit card balances and combining them into one loan. The best debt consolidation loans have low interest rates. Because these consolidation loans usually have low interest rates, you may save more money with this method then you would if you completed a credit card balance transfer, if the credit card comes with a high-interest rate.

Another bonus associated with debt consolidation loans is you can usually combine secured and unsecured debt into the loan. To make this worth the effort, and to have a positive impact on your monthly budget, you’ll need to have an excellent credit rating.

Debt Management Plan

If you attend credit counseling, one option a counselor may suggest is a debt management plan. A debt management plan goes by many names such as a debt management program, or only a DMP. No matter what name it goes by, it’s a debt relief option for people that have already been negatively impacted by their debt situation. If your credit has already taken a hit because of missed or late payments, you won’t qualify for the options mentioned above, but may still be able to enroll in a debt management program.

In fact, a good credit score isn’t required at all to enroll in a DMP. Even better, your credit history won’t be negatively impacted by you taking part in a debt management program. If you participate in the program and abide by it, your credit will slowly get better.

To enroll in a DMP, you need to visit a credit counseling agency. The agency will go over your financial situation, propose a budget plan, and work with your creditors to act on your behalf. When negotiation and payments have been arranged, debtors will make one payment to be distributed amongst all their creditors. Usually, a debt management plan is paid in full in 3 to 5 years. You may also be required to not open any new credit cards while you are enrolled in the program.

It’s important not to sign up for a debt management plan until you have spoken with and had your financial situation examined by a reputable credit counselor. It’s also important to realize just enrolling and completing a DMP will not solve all your financial issues. You’ll still need to participate in budgeting and learning better money management skills to be more responsible and secure financially in the future.

Debt Settlement

If none of the debt relief options mentioned above aren’t right for you, it might be necessary to consider debt settlement. Unlike a debt management plan, which is usually suggested by non-profit credit counseling agencies; debt arrangements are often proposed by for-profit debt relief companies. This option allows you to settle your debt for less than you originally owed. You may be able to pay off debts in one discounted lump sum or be put on a partial repayment schedule. Unlike debt management, a settlement will reflect negatively on your credit report. However, your credit history will be less damaged with debt settlement then it would be if you filed bankruptcy.

Before you can qualify for a debt settlement with creditors, you will usually have to prove that you have considered or tried other methods of debt relief. No matter how bad you think your situation is, you should always consider all the options available because you may be surprised to find your situation isn’t as dire as you think.

The problem with debt settlement is it has a huge dropout risk. People often struggle to make the necessary deposits long enough to have their debts settled. Debt settlement agencies are under no obligation to pay off your debts with the money you deposited. If you partner with a sketchy or predatory company, they may not settle any of your outstanding debts. Lastly, many businesses opt to pay small debts first, which leaves massive debts accumulating fees and interest in the meantime. Additionally, if you are sued by a credit card company while participating in debt settlement, the judge could order the garnishment of your wages, which makes a difficult financial situation even worse.

Consequences Associated with Debt Relief

Unfortunately, there are some adverse effects associated with any debt relief service. In some cases, forgiven debt can be considered income and therefore taxable. Credit card companies could report any settled debt to the IRS. Unless you are deemed insolvent, the amount settled becomes income, and you’ll be required to pay taxes on it.

How to Choose the Right Debt Relief Option

When you are trying to determine what debt relief option is best for you, you need to think about what you want your situation to look like in the future. The best solution for you is one that lets you pay off your debt with affordable monthly payments and does the least bit of damage to your credit rating. Owing money that you don’t feel like you can pay off someday makes you vulnerable. Unfortunately, there are companies in existence that feed on this vulnerability, which ends in a worse financial situation. To avoid this, you have to take your time when determining how to pay off debts and doing your research to make sure you work with a reputable agency to assist.

How to Find the Right Debt Relief Provider

The information above will help you zero in on the debt relief method that is right for your situation. But, you still need to choose a provider to help you move in the right direction and complete the process successfully. Using a reputable debt relief company can make your chances of making your situation better and succeeding in the future easier to do.

Debt Relief Option Red Flags

The old saying “if it sounds too good to be true, it probably is,” that applies when it comes to choosing debt relief options and agencies. The following list is situations that should set off red flags in your mind. If a company participates in any of the behavior below, you should continue searching for another option or agency.

• Requires upfront costs
• States there are no fees but asks for “voluntary contributions” (code for fees)
• Advertises a “new government program” for credit card debt relief
• Guarantees it will remove all unsecured debt
• Orders you not to communicate with creditors (with no further explanation)
• Promises to stop all collection calls and prevent any lawsuits
• Tells you to expect to pay pennies on the dollar
• Requires you to divulge personal information to get free information about services offered
• Suggests a debt settlement or management program before reviewing your financial information
• Tries to enroll you in a DMP without providing budget and money management techniques
• Demands payments are made to a DMP account before creditors have officially accepted your enrollment

Some predatory debt relief agencies will even try to convince callers or inquirers that President Obama himself has just signed new legislation that allows them to eliminate debt. It’s important in any situation with a debt relief agency to listen to all the information provided, ask questions regarding anything you don’t understand, and get all promises in writing on official letterhead.

If you have any doubts about the company you are thinking of working with, it’s important to read online reviews. Make sure you do a national search for the company on the Internet and make sure to check out their business on the Federal Trade Commission’s website too.

There you have it, an explanation of debt relief options that even a dummy could understand. We’ve broken down these options in easy to understand terms and descriptions, so you know what is available to you and how you can use these options to better your financial future. When you choose wisely, learn techniques for the future, and follow through with advice and programs suggested, you’ll be better equipped to have a stronger financial future.

If you want to learn more about debt relief options, check out our Ultimate Guide to Debt Relief.