Credit card hardship programs: how do they actually work?

Call the number on the back of your card, say you are dealing with a financial hardship, give the reason in one sentence and name the monthly payment you can afford. Ask what program the issuer offers, how long it lasts, what rate and payment apply, and how it will be reported to the credit bureaus, then ask for the terms in writing. Do it before you miss a payment if you can; you have more options while the account is current.

Issuers run these programs because a borrower who pays something beats a charge-off. Most programs come with a cost of their own, usually a frozen or closed card, so it helps to know what is on offer before you call.

The three kinds of help you might be offered

• A temporary hardship program. A lower rate, a lower payment or both for a set period. Federal bank regulators’ 2003 guidance on credit card account management treats these as short-term help and says any program longer than 12 months, including renewals, counts as a workout program instead.
• A workout program. A longer plan for borrowers who can’t return to the original terms. The same guidance says workout programs “should generally strive to have borrowers repay credit card debt within 60 months,” which in practice means a much lower rate, a closed account and fixed payments.
• A debt management plan. Arranged through a nonprofit credit counseling agency rather than the issuer, it covers several cards at once with a single monthly payment. Our comparison of credit counseling and debt settlement explains how it works.

If your problem is a high rate rather than a cash shortfall, you don’t need a hardship program. Asking for a lower APR while you are current is a different conversation, covered in our guide to negotiating a lower rate.

Before you call

Work out one number: what you can pay each month on this card without missing rent, utilities, food or transportation. List take-home pay, subtract those essentials, and divide what is left among your debts. If you have $300 left and three cards, you can’t promise $200 to one of them. Our debt payoff budget shows the full worksheet.

Have three facts ready: what changed (job loss, reduced hours, medical bills, divorce), when it happened, and whether it is temporary. “My hours were cut by 40% in August, and I expect to be back to full time in six months” is the kind of statement an agent can act on.

What to ask on the call

Ask for the hardship or financial assistance department; at many issuers it sits in collections or “customer assistance.” Then go through these questions and write down the answers:

1. What rate will apply during the program, and what payment?
2. How long does it last, and what happens to the rate and payment when it ends?
3. Will the card be suspended or closed, and can it be reopened later?
4. How will the account be reported each month: as current, as paying under a modified agreement, or as late?
5. Will late fees and over-limit fees be waived while I’m in the program?
6. Can you send the terms in writing?

That last question has a legal hook. Under Regulation Z (12 CFR 1026.9(c)(2)(v)(D) and 1026.55(b)(5)), if the issuer plans to raise the rate back when the arrangement ends or if you fall out of it, it must give you a clear written disclosure of the terms before the arrangement starts. When the deal is made by phone, the issuer may disclose the terms orally and mail the written version as soon as reasonably practicable. And when the program ends, the rate on your old balance can’t go above what it was before the program. Ask for the agent’s name and a reference number, and check that the letter matches what you were told.

What the numbers can look like

Here is an illustrative case. You owe $6,000 on a card with an APR of 27%, and the minimum payment (1% of the balance plus interest) is $195. You can only manage $150.

• Paying $150 with no program: you fall short of the minimum and get reported late. Even if late fees were set aside, a year of $150 payments at 27% would cost $1,595.95 in interest and leave $5,795.95 owed.
• A 12-month program at 9%: the same $150 payments cost $486.70 in interest and bring the balance down to $4,686.70.
• A 60-month workout at 9%: $124.55 a month clears the $6,000 in five years.

The rates here are examples; issuers set their own program terms, and some offer a rate close to zero.

How a hardship plan affects your credit

What moves your score is what the issuer reports: whether payments show as on time, and what happens to your credit limit. A program that keeps the account reported as current protects your payment history, which is 35% of a FICO score by FICO’s own weighting.

The usual hit comes from the card being closed. If you have two cards with $5,000 limits and owe $2,500 on one, you are using 25% of your available credit. If the issuer closes that card and its limit stops counting, the same $2,500 is 50% of $5,000. Closing does not erase the card’s history; a closed account in good standing can stay on your report for up to 10 years.

Issuers may also add a comment to the account. FICO says a notation that you are in a debt management plan is not counted against your score, but a lender reading your report by hand can see it.

If you are already behind

Ask whether the issuer will bring the account current once you start paying under the plan. Federal bank policy allows that, which banks call re-aging, after you make at least three consecutive minimum monthly payments or the same total amount, and no more than once in 12 months or twice in five years. It stops the account’s march toward a charge-off at 180 days past due. Our timeline of what happens when you stop paying shows each step of that march.

If the answer is no

Call again another day, or ask for a supervisor; programs and agent authority vary. Then look at the statement itself: the CARD Act requires a toll-free number on every monthly statement where you can get information about credit counseling. A nonprofit counselor can propose a debt management plan to all your card issuers at once. The FTC’s guidance on credit and debt explains how to spot a legitimate agency, and the CFPB’s credit card pages and the Regulation Z text cover the rules above.

If even a reduced payment isn’t realistic, talk to a bankruptcy attorney about whether Chapter 7 or Chapter 13 fits your situation.