What is a credit card hardship program?
Bankrate dives into how credit card hardship programs work, their eligibility requirements, the advantages and disadvantages of participating, the steps involved in the process and alternative options to consider.
Finding it increasingly difficult to pay your credit card bills due to some bad luck? Have you overcharged beyond your ability to repay your debt? Worried that your credit rating may be severely damaged if you don’t do something soon?
Thankfully, there are options. One of them is to participate in a credit card hardship program, which is a structured offering designed to assist consumers facing personal and financial adversity and help them avoid defaulting on their credit cards.
Read on to learn about how credit card hardship programs work, their eligibility requirements, the advantages and disadvantages of participating, the steps involved in the process and alternative options to consider.
Credit card hardship programs explained
A credit card hardship program is a financial arrangement offered by credit card-issuing banks and lenders through which you negotiate to make smaller or more manageable payments on your outstanding debt.
Often, through these arrangements, lenders or banks agree to temporarily reduce or eliminate interest charges, lower your payments, waive late fees and extend payment due dates. You may even be allowed to temporarily suspend payments altogether under certain conditions. Any of these measures can make it easier to pay back what you owe during a difficult period.
Consider that the average credit card interest rate today is a record-high 20.71% and that many credit cards charge costly late fees. This double-whammy makes it tough for many financially challenged borrowers to get out of their cycle of increasing debt — especially if they’ve experienced a serious setback like an illness, divorce or job loss.
Modifications permitted under a credit card hardship program can lead to substantial savings, potentially amounting to thousands of dollars saved in interest and fees. However, credit card hardship programs won’t last forever; they often expire after three to 12 months.
Good candidates and qualification requirements
Anyone unable to pay their credit card bills as a result of hardship may qualify for a credit card hardship program.
“These programs are designed to provide relief to individuals facing genuine hardships, such as a sudden job loss or serious loss of income, medical emergency or other unforeseen event that’s caused a significant drop in income or an increase in expenses,” said Venture Smarter CEO Jon Morgan.
Other hardships that qualify for this type of program include suffering a serious and costly illness or injury, a divorce, a family emergency or a natural disaster.
“The requirements for qualifying for a credit card hardship program will vary from issuer to issuer,” personal finance expert Andrew Lokenauth with TheFinanceNewsletter.com, notes. “Some common eligibility requirements include being current on your payments for at least six months, having a good credit history and being able to prove you are experiencing financial hardship.”
“Many institutions also require that the consumer meet with a credit counselor or complete a debt management program to qualify,” says Laura Sterling, vice president of Marketing for Georgia’s Own Credit Union.
Pros of a credit card hardship program
A credit card hardship arrangement has its benefits and drawbacks, each of which is worth exploring carefully.
“On the plus side, you may be allowed to pause or lower your payments. Your interest rate may be temporarily reduced. You’ll likely be allowed to make lower monthly payments without being charged late fees. And you could avoid seriously damaging your credit,” says Lokenauth. “Most importantly, it will provide extra time to help you get back on your feet financially.”
Other advantages include the opportunity to avoid default or bankruptcy and reduced financial stress.
To illustrate the benefits of a credit card hardship program, imagine you have a credit card with a $5,000 balance and an interest rate of 20%. You’ve lost your job and can no longer afford the minimum monthly payment of $200.
“With a hardship program, let’s say the bank agrees to reduce your interest rate to 5% and lower your monthly payment to $100. Over the next 12 months, you pay a total of $1,200 instead of $2,400, making it more manageable while you search for a new job,” says Morgan.
As another example, assume you face unexpected medical expenses of $3,000, which you charge to your credit card. The card assesses an interest rate of 18%, but after entering into a hardship program with the card issuer, your interest rate is lowered to 8%.
“Here, you can potentially save $300 in interest charges over the course of the year,” Morgan adds.
Disadvantages of a credit card hardship program
On the other hand, being in a credit card hardship program may have a temporary negative impact on your credit scores, as participation in these types of programs — as well as any missed payments —can still be reported to the three credit bureaus.
Additional disadvantages include the following:
•Your credit card account may be frozen while you’re enrolled, which means you won’t be able to use the card. While this may be helpful from a financial perspective, it can make life more difficult if you’re still relying on access to the card’s credit.
•Card issuers can continue charging interest during your program participation. As a result, the balance on your card may keep rising.
•The plan may extend your borrowing terms and increase the total interest you’ll pay.
•You may be obligated to set up automatic payments from your bank account to ensure the credit card gets paid. Doing so could create additional hardship if you’re already juggling making payments as funds become available.
Where you can find a credit card hardship program
To inquire about and enroll in a credit card hardship program, contact your credit card and ask if they offer one.
“Many major credit card issuers — including Chase, Citibank, Bank of America and American Express — offer these programs,” Morgan continues.
Just be aware that you’ll have to initiate the conversation.
“Credit card issuers do not advertise credit card hardship programs, even if they do provide them. So if you have a hardship, it’s best to reach out to your issuer directly to see what assistance they offer,” advises Sterling.
Once you’ve reached out to your lender, prepare to take the following steps:
•Document your hardship. Prepare, gather and submit documentation that proves your financial difficulties. This may include items such as a job termination letter, costly bills triggered by a natural disaster, medical bills or other income statements.
•Negotiate and agree to the terms. “Discuss the available options with your bank, including reduced interest rates, waived fees, lower monthly payments or a temporary suspension of payments,” says Morgan. Note that you may be required to sign a program contract to enroll.
•Complete the program according to the rules. Make your new monthly payments on time, stick to the agreed-upon terms and comply with any program requirements. Be aware of when the program expires, too.
Alternatives to a credit card hardship program
Entering into a credit card hardship program isn’t your only choice. Instead, check out these additional options:
•Apply for a balance transfer credit card. This type of card may be able to help you pay off your debt by enabling you to transfer your existing card balances to a new credit card with a 0% intro APR period for a set period of time (typically 12-21 months). This can save big money you’d otherwise spend on interest alone.
•Explore a debt consolidation loan. “Here, the payments may be more manageable if you can consolidate multiple high-rate loans into one lower-rate loan,” suggests Sterling.
•Pursue credit counseling. “Seek advice from a certified credit counselor with a nonprofit organization that can help you create a budget and explore debt management options,” Morgan says.
•Investigate debt settlement. “With this option, you negotiate with your creditors to settle your debt for less than you owe, but it can be a risky option because it may damage your credit,” Lokenauth says.
•Consider bankruptcy as a last resort. “While it has significant long-term consequences, bankruptcy may be necessary for those with overwhelming debt and no other viable options,” adds Morgan.
The bottom line
Mounting credit card debt can leave you feeling overwhelmed and anxious. But if you can demonstrate a true financial hardship, you can lift the weight of worry to some degree by working with your credit card issuer to repay what you owe on more preferred terms and with fewer penalties and charges.
“Just be sure to do your research and explore all your available options before you enter into a credit card hardship program,” Lokenauth recommends. “Also, read the fine print carefully and make sure you understand all the terms before signing or committing to anything.”
Key takeaways
•A credit card hardship program may allow you to pause or make smaller payments on your credit card debt with more preferred terms and waived fees.
•Many credit card issuers offer credit card hardship programs you may qualify for.
•Other options to consider include balance transfer cards, debt consolidation loans, credit counseling, debt settlements or — as a last resort — bankruptcy.
___
(Visit Bankrate online at bankrate.com.)
©2023 Bankrate.com. Distributed by Tribune Content Agency, LLC.