hardship program

Hardship program/plan and how they can affect your credit

If you are drowning in or overwhelmed by your credit card debt, your credit card issuer may have a hardship plan that will help you manage your debt and help you dig yourself out of debt.

Trapped in a debt spiral?

If you are trapped in a debt spiral with interest rates and monthly payments that are becoming impossible to meet? If this sounds like you, you may be a bit overwhelmed. However, by looking into your credit card company’s hardship program, it could help you.

Oftentimes, hardship plans are not advertised. This is a well-kept secret, using a unique payment plan can help reduce your monthly minimum payments and break out of your continuously amounting credit.

If you think this may help your debt situation and positively impact your financial situation, continue reading to see how a hardship plan can impact your credit score:

hardship program

What are hardship plans?

First, it is important to note that hardship programs are not the same as a typical debt management plan you often see advertised. Instead, they give you access to credit counseling that gives you a direct line of communication between you and your creditors. 

These counseling services comprehensively analyze your income and spending habits for a fee. They then negotiate terms with your lenders and will pay all of them with a single monthly payment from you. In addition, high interests are often lowered when you enroll in a hardship plan.

Most credit companies offer this resource, but rarely advertise them. It is also important to note that there are no intermediaries and no mass payment of lenders, instead, you will be working directly with your credit issuer to use a hardship program to help take back control of your personal finances. 

Although every creditor will have slightly different policies, typically, every plan will offer the following benefits:

  • Lower interest rates
  • Lower minimum payments
  • Lower fees
  • Lower penalties
  • Fixed payment schedules

In addition, if you are facing a temporary rough patch, like a recent job loss or serious accident, explaining your situation to your creditor can persuade the company to offer you money-savings perks during the payment plan. Your credit may sympathize with you during a time of financial hardship.

What to watch out for:

Just signing up for a hardship plan will have no impact on what is reported to credit bureaus and will not directly reflect on your credit report. However, hardship plans can positively affect your credit score because of the nature of the program.

First, your credit card issues can decide to put a note on your credit report about your enrollment. Although it does signal that you are taking the right steps to repay your current lines of credit, it can make new creditors nervous to extend credit to you. It may be important to talk to your credit card issuer to determine if a note about your enrollment will be sent to the three major credit-reporting bureaus. 

In addition, your card issuer may close or suspend your account for the short term when you are participating in a hardship plan. This suspension will hold until the payment plan is complete.  It is important to remember that closing a credit card can hurt your credit score. It can hurt it by increasing your credit utilization, by shortening your overall length of credit history and by changing your credit mix.

Will this actually improve my credit?

After enrolling in the hardship plan, you may see a dip in your credit score initially. However, do not be alarmed, this is typically temporary. By making on-time payments for a few months and demonstrating superb financial responsibility behaviors, you can begin to raise your credit score back to where you want it. 

Payment history is the most important factor when determining your credit scores, especially your FICO score. Currently, strong on-time repayment history makes up around 35% of your score. If you are a candidate for a hardship plan, you have already missed minimum payments on your credit cards. These plans will help you build a strong repayment history while paying down your debt.

Sticking to a hardship plan’s repayment schedule is a great way to rebuild your credit score. Instead of late payments being sent in to the credit bureaus, your lender can report a strong history of consistent, on-time payments, which will raise your credit score over time.

Is a hardship plan for me?

Hardship programs are not for everyone. If you are intimidated by contact all of your creditors directly, are unorganized or simply just don’t want to manage everything by yourself, debt management may work better for you.

However, it is important to note that debt management can leave you in worse debt than when you started. If you are facing temporary financial crises, your issuer may be able to extend a hardship plan to you to help you repay your debt.

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