Credit cards are often viewed as quick and convenient solutions for managing unforeseen expenses, but over time, they can transition from being beneficial to burdensome. A significant challenge individuals may face is the difficulty in making minimum payments, a situation shared by many. The Federal Reserve Bank of New York reports that 9.1% of credit card balances have become delinquent over the past year.
For those struggling with payments, there are some options available to temporarily halt these obligations and provide some respite.
Credit Card Forbearance
Certain credit card issuers offer forbearance programs that can temporarily suspend payments, potentially without adversely affecting credit scores, although this is contingent on how the creditor communicates with credit agencies. Forbearance periods are often limited to 90 days. These programs might also waive late fees or temporarily reduce interest rates; however, the availability of these concessions depends on the creditor, and balances could still accrue during this period. Eligibility for forbearance may require demonstrating financial hardship, such as a recent job loss, with appropriate documentation enhancing the likelihood of approval. Contacting the credit card provider is the recommended initial step to explore available options.
Bankruptcy
In cases of bankruptcy, it is generally advised to cease credit card payments. Bankruptcy represents a significant measure, as it can severely affect credit for seven to ten years and result in the cancelation of credit cards. Typically reserved for severe financial distress, bankruptcy can encompass difficulties not only with credit card payments but also with essential living expenses. Filing for bankruptcy involves costs, including those for credit counseling from an approved provider and possibly legal fees if consulting an attorney. Two filing options to consider are:
- Chapter 7: Involves settling debts by liquidating assets, with no further payment obligations to creditors.
- Chapter 13: Entails devising a payment plan to gradually settle debts while retaining assets.
Debt Settlement
Debt settlement programs generally involve hiring a private company to negotiate debts with creditors. During this negotiation process, the company might require the client to start saving a specific amount in a designated account for potential settlements. However, several drawbacks exist:
- Payment to the debt settlement company is typically required.
- Settlement success is not guaranteed and may result in a lump sum payment obligation.
- Creditors may initiate legal action for non-payment during negotiations.
- Any successful settlement might be taxed as income.
Given these risks, individuals in precarious financial situations are advised to consult a qualified credit counselor to evaluate their options.
Moving Forward
Upon improving their financial situation, individuals might consider canceling some credit cards to prevent future debt accumulation. However, caution is advised, as canceling credit cards can negatively influence credit scores by increasing the proportion of remaining debt to available credit and potentially shortening credit history. Maintaining good credit is a prolonged endeavor, but it facilitates achieving significant financial goals and reduces loan interest rates. It also provides access to financial tools like balance transfer cards, which can aid in future debt management. It’s essential to weigh the potential impacts of closing credit cards and consider alternate strategies to maintain financial flexibility.
