WHAT IS A HARDSHIP PROGRAM & HOW CAN IT IMPACT YOUR CREDIT SCORE?

While we all hope that we will never be in a situation where we can’t afford to keep up with our payments, things do happen. Rising debt can cause excessive stress, especially if you are facing financial hardship due to circumstances beyond your control like health issues, unemployment, sudden major expenses or any other change in income. Even if your financial hardship is temporary it does not mean it is easy to handle. Things can become tricky if you rely on your credit card to make ends meet on your bills. This strategy can greatly raise your debt and lower your credit score.

The good news is that assistance is available. Your card issuer likely offers an unadvertisedhardship programthat could give you the breathing space you need to dig out and get back on the road to good credit. Let us dive into what a credit card hardship plan is and how it might impact your credit in unexpected ways.

  1. WHAT IS A HARDSHIP PLAN?

A hardship plan is also known as a credit card payment plan. It is offered by banks to provide immediate relief to customers who are dealing with a financial crisis and cannot make regular payments due to unforeseen circumstances. This plan allows a consumer to temporarily reduce monthly payments to a manageable level.

 Hardship plans are either short-term (i.e. six months or one year), or permanent (till the card balance is paid).  They often involve lowered interest rate, altered repayment plan, or a combination of the two. Some companies also waive certain late payment fees, over-limit charges, and the like.

2. WHO IS IT FOR?

You may be eligible to enroll in this type of plan if you are struggling to make your credit card payments each month and have some sort of financial hardshipgoing on in your life. The eligible hardships situations include:

  • Major medical issues.
  • Loss of employment.
  • A death in the family.
  • The breakup of a marriage.
  • Unexpected home or automobile repair costs. 
  • Emergency event or natural disaster.
  • HOW TO ENROLL:

The credit card companies typically do not advertise this benefit so it is you who should initiate it. Shore says that most creditors will have a phone number right on the statement which will not be obvious, but you should look for language along the lines “If you have problems paying your balance, call this number.” The number could connect you to the hardship departmentor, more likely, a customer service departmentthat will screen you. But, before you contact the company make sure you have organized your finances and know what kind of help you need. You must be honest with your credit card company about why you need to enroll in such a plan and offer details about your hardship (including the reasons), and how much you can afford to pay monthly and how long expect you expect the problems to last.

3. HOW IT CAN IMPACT YOUR CREDITCREDIT SCORE?

Just signing up for a hardship plan has no effect on your credit. However, figuring out how it will impact your creditwhile you are in it (and after)can be tricky. According to Barry Paperno, consumer operations manager for FICO, “It depends on how it appears on your credit report.” He says, that how the issuer will report your agreement to the credit bureaus is the first question that you ask.So, before you sign up for a payment plan, you should talk with your issuer about what note (if any) will be sent to credit bureaus.

Secondly, while you are participating in a hardship program there is a likelihood that your card company will close or suspend your account until your payment scheduled is complete. This can affect your credit scores by:

  • Increasing your credit utilization ratio. When an account is closed, you eliminate some of the available credit and your score will drop to reflect the increase in  utilization ratio
  • It will also affect the credit mixas FICO® rewards you for having a combination of credit cards, car payments, mortgage and other types of loans. So when a card is shut down your credit mixture changes and that could affect your scores.
  • It can also affect the length of credit historyif your company closes one of your older cards when putting you on a payment plan. As a result, your average credit age will decrease, and your scores could go down.

However, if you successfully complete your program, the initial dip in your credit scores could get your credit back to where you would like it to be. Here is why:

If you are signing up for a hardship program, it is likely that you have already missed some minimum payments on one or more of your credit cards. This means that you have already seen your credit scores decline.

Fortunately, if you stick to a hardship plan’s payment schedule you will rebuild your history of timely debt repayment. Your lender who reported your late payments to the credit bureaus will now report your consistent, on-time payments.  This means good news for your scores.

Bottom line

Do you think a hardship plan is right for you?

Nitzche says “They are not right for everybody.”

If you are facing a relatively minor problem or a temporary financial crisis with just a few cards you can call up your credit card issuer and make your case. This could be a turning point in conquering your credit card debt.

 However, if you are somebody who is struggling with being organized, have multiple creditors, or are intimidated by contacting all of them directly and feel that managing all individual payments is daunting then you should see a credit counselor and consider debt management.