Interested in a credit card hardship program? Weigh pros and cons

With the country’s economy now officially in depression, life events like a job loss or an illness can lead to serious financial hardship. Although the source of income will disappear, many people will still need to repay credit cards or loans taken out in economically kinder times. Missed or late payments will damage your credit score and cause additional charges. Thinking about a credit card hardship program to stay on top of your finances in difficult financial times? Learn more how it works.  

Financial uncertainty is a fact of our present-day life. Nobody is protected from a job loss or unexpected life-changing accident. It won’t be easy to find a good way of coping without a regular income when credit card interest rates are constantly rising, and fees and penalties are added to your account balance each month.

It is not uncommon for banking institutions to face situations where good cardholders miss payments because of the emergency situations outlined above. As a result, a lot of financial institutions, including credit card issuers such as Citibank, Bank of America, Discover, etc. offer a hardship program designed to help credit card holders maintain their debt. 

A credit card hardship program is similar to a loan workout, which helps borrowers restructure their debt and avoid defaulting. Basically, it is an agreement between a credit card company and a borrower. Under that agreement, you set up a payment plan, and the bank reduces your interest rates and sometimes your monthly payment to a level you can afford. 

However, keep in mind that it is pretty unlikely that credit card issuers will reduce the amount you owe as a part of a hardship program. The main reason that banks offer hardship programs is that they hope you will get back on your feet and be able to return to making full payments on your account. As many other businesses, credit card companies primarily care about profit. 

However, it is possible that a lender will reduce your balance if they see that you are heading towards bankruptcy. In this case they can eventually agree to a lump-sum settlement to close out your account. Of course, the amount will vary depending on your particular financial situation and the relationship with that bank.

Hardship programs aren’t aimed at people who have overextended their credit card limits and are looking for a good way out. Typically, they are reserved for life-changing events which cause financial hardship: a job loss, divorce, a long-term illness, disability, accidental death in the family, and so on.

A credit card hardship program is different from a “Payment Protection Plan,” which actually is a paid supplemental loss-of-income insurance. It provides an alternative source of income during difficult life events like involuntary unemployment or unpaid family leave. The insurer will cover your credit bills for a fixed period of time – from 3 to 12 months.

Typically, credit card companies don’t advertise hardship programs, so it makes sense to browse their website or google necessary information online. You can find responses from people who were successful in negotiating a hardship program with your bank. 

The next step is to call your credit card issuer and ask about a program. In an interview process you will have to tell about your sources of income vs. expenses. Make sure to have all that information detailed and ready before you call in. Naturally, the lenders will also want to know about how you are going to eliminate your debt and when they can expect your regular payments to resume.

However, keep in mind that credit card hardship programs have some potential downsides. There is no guarantee that you will be able to reduce your interest rates from 20% to 2%. Some lenders can lower your spending limit or even close your account. And enrolling in a hardship program will likely be indicated on your credit report and affect your credit score. 

So you need to weigh all pros and cons before trying to apply for a hardship program. An alternative solution is to deal with a free counseling service, which can help you create an appropriate debt management plan based on your income and expenses. The credit counselors can contact your lenders to reduce both your annual interest rate and monthly payments.