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Credit cards can seem like the simplest, fastest solutions for dealing with unexpected expenses. But over time, they can quickly turn from an asset to a liability.
If you find yourself having difficulty making the minimum payments on your credit cards, you’re not alone. In fact, 9.1% of credit card balances fell into delinquency over the past year, according to the Federal Reserve Bank of New York.
If you’re in that position, there are a couple of options you may have to pause those payments and buy yourself some breathing room.
Credit card forbearance
Some credit card companies offer forbearance programs, which can pause your payments, potentially without hurting your credit (though this depends on how the creditor reports it to credit agencies). Often, these are limited to a 90-day period.
These programs may also be able to waive late fees or even temporarily lower your interest rate — but the availability and relief options will depend on your creditor. So it’s possible that your balance may grow during this time.
Qualifying for forbearance may be dependent on financial hardship. For example, if you’ve recently suffered a job loss and can provide documentation of that, your request for forbearance may be approved. The best first step to understanding your options here is to call your credit card company.
Bankruptcy
If you’re filing for bankruptcy, it’s typically advised that you stop making your credit card payments. However, this is a radical option, as bankruptcy has a major impact on your credit for the next seven to 10 years, and it can result in having your cards canceled.
That’s why bankruptcy is generally only reserved for those who are having serious financial difficulties. That can include trouble making credit card payments as well as paying for basic necessities.
It also costs money to file bankruptcy and see a credit counselor from an approved provider. You may also want to consult an attorney, which can have its own costs. If you want to go this route, however, there are two filing options you may want to consider.
| Bankruptcy Type | What It Is |
|---|---|
| Chapter 7 | You’d pay for your debts by selling off assets, but you don’t have to make payments to creditors after that. |
| Chapter 13 | You’d create a payment plan to pay off your debts over time, but you get to keep your assets. |
What about debt settlement?
Debt settlement programs typically involve a private company contacting your various creditors to negotiate your debt with them. During this time, however, the debt settlement company may require you to start setting aside cash in an account to be paid if the settlement is successful.
There are a few other drawbacks you should be aware of here:
- You typically have to pay the debt settlement company to do this for you.
- Settlement is not guaranteed, and it would result in a lump sum payment requirement, at best.
- Your credit card company can sue you if you stop making payments while a debt settlement company is attempting to negotiate.
- Any successful settlement could be taxed as income.
In other words, it can be extremely risky to go this route. If you’re in a precarious financial position, it’s a good idea to contact a qualified credit counselor to understand your options.
Going forward
Once you’re headed back toward a better financial position, it may be tempting to cancel some of your credit cards to avoid having the option to go into more debt. But you should be cautious here; canceling cards can have a negative impact on your credit because it could mean any remaining debt you have becomes a larger proportion of your available credit. It can also shorten your credit history.
It can be a long process to build good credit. But when you need it, a high credit score can help you make positive steps toward big financial goals and save you money on interest when you take out loans.
It can also help you access other financial resources, like balance transfer cards, which can help you save money on debt in the future. (Check out our list of the best balance transfer cards to learn more about this option.)
That said, if you know that having an extra card open is going to have a negative impact on your finances, canceling it may be the right call. Just know the potential consequences of that so you can take other steps to ensure you won’t be closing yourself off from other financial opportunities.
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