How a hardship plan can affect your credit (2024)

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Are you trapped in a debt spiral of mounting credit card debt, high interest rates and a minimum monthly payment that’s becoming difficult to meet?

If you are, you might be feeling frightened or overwhelmed. But your credit card company likely offers an unadvertised program that could make all the difference.

A hardship plan, also known as a credit card payment plan, is a well-kept secret that has the potential to save you big bucks in interest, reduce your monthly financial burden and finally let you break free of your debt spiral.

Think a payment plan might be right for your financial situation? Let’s dive in to what a hardship plan is (and isn’t) and how it might impact your credit in unexpected ways.

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  • What is a hardship plan?
  • Possible downsides of a hardship plan
  • How could your credit improve?

What is a hardship plan?

A hardship plan is not the same as the debt management plans you see advertised on TV.

With a debt management plan, you work with a credit counselor who acts as the liaison between you and all your unsecured debt creditors. Typically for a fee, the counseling agency analyzes your income and spending, negotiates debt repayment terms with each of your lenders and pays all of them with a single monthly payment it collects from you.

With a hardship plan, however, there’s no intermediary and no mass payment of lenders. Instead, you work directly with your credit card issuer and participate in its unique repayment program. Many creditors do offer hardship plans, though you’ll rarely find them advertised.

“Each creditor’s policy is a little bit different,” says Thomas Nitzsche, credit educator and communications lead at Clearpoint, a nonprofit credit counseling agency. He notes that plans typically offer a combination of the following benefits:

  • A lower interest rate
  • A smaller minimum payment
  • Lower fees and penalties
  • A fixed payment schedule

When you’re facing a temporary financial rough patch — a recent job loss, medical emergency or serious accident, for example — Nitzsche says that calling your creditor and telling your story may persuade the company to offer you the money-saving perks of a payment plan.

Possible downsides of a hardship plan

The act itself of signing up for a hardship plan has no effect on your credit. However, once you enroll, your credit scores could be indirectly affected because of the way the program works.

First, your credit card issuer may put a note on your credit reports regarding your participation in its hardship plan. So while the note signals that you’re taking positive steps to responsibly repay your lenders, it could make potential creditors nervous about your financial situation. Before you sign up for a payment plan, talk with your issuer about what note (if any) will be sent to the credit bureaus.

Second, while you’re participating in a hardship program, your card company may close or suspend your account until your payment schedule is complete. And closing a credit card — whether you do it yourself or your card company does it for you — can hurt your credit scores by affecting a few different things:

  • Credit utilization ratio: Your credit utilization ratio represents the portion of your available credit that you actually use, and it accounts for a whopping 30 percent of your FICO® score. In general, your scores can increase as you use less of your total credit limit. So, when you shut down a card, you eliminate some of that available credit. And if you don’t decrease your credit card spending, your scores will drop to reflect the increase in your utilization ratio.
  • Length of credit history: Your credit scores reward you for having mature lines of credit. In fact, 15 percent of your FICO® score depends upon the length of your credit history. So if your creditor closes one of your older cards when putting you on a payment plan, your average credit age will decrease, and your scores could go down as a result.
  • Credit mix: FICO® rewards you for having a desirable combination of credit cards, mortgages, car payments and other types of loans. This combination — or credit mix — makes up about 10 percent of your FICO® score. When you close a card, your credit mixture changes, and that could affect your scores.

That said, participating in a hardship plan could actually benefit your credit scores in the long run.

How could your credit improve?

After you sign up for a hardship plan, you might see a concerning dip in your credit scores. This typically isn’t permanent, though it could take months of on-time payments and responsible behavior to get your credit back to where you’d like it.

If you successfully complete your program, that initial dip could transform into a sizable credit score increase. Here’s why:

If you’re thinking about signing up for a hardship program, you may have already missed some minimum payments on one or more of your cards. Payment history is the No. 1 factor in determining your FICO® score, making up 35 percent of the score. So you may have already seen your credit scores decline after missing payments.

Fortunately, sticking to a hardship plan’s payment schedule is an excellent way to rebuild your history of timely debt repayment. Your lender, who reported those late payments to the credit bureaus, will now report your consistent, on-time payments — which can mean good news for your scores.

Bottom line

So, is a hardship plan right for you?

They’re not right for everybody, Nitzsche says.

“If you’re somebody who struggles with being organized, if you have multiple creditors, if you’re intimidated by contacting all of them directly, or if the thought of managing all those individual payments each month is daunting,” he says, “it might behoove you to see a credit counselor and consider debt management.”

Just be aware that dealing with debt settlement companies can be risky, according to the Consumer Financial Protection Bureau, and might leave you deeper in debt than when you started. The CFPB recommends seeking out a nonprofit consumer credit counseling service as an alternative or speaking with a bankruptcy attorney if you’re considering that route.

If, however, you’re facing a temporary financial crisis or a relatively minor problem with just a few cards, your card issuer may be willing to extend concessions when it comes to repaying. So pick up the phone, call up your creditor and make your case. It could be the turning point in conquering your credit card debt.

Ready to start improving your low credit score?Explore Credit Builder

About the author: Megan Nye is a personal finance writer with a decade of experience in the insurance industry. Her writing has been published by Business Insider, Citi, LendingTree and others. Megan has a bachelor’s in mathematics fro… Read more.

How a hardship plan can affect your credit (2024)

FAQs

How a hardship plan can affect your credit? ›

Being in a credit card hardship program may temporarily negatively impact your credit scores. However, participation in these types of programs, as well as any missed payments, can still be reported to the three credit bureaus.

Does financial hardship affect my credit score? ›

Credit reporting bodies do not use financial hardship information to calculate your score, however, missed repayments do impact your credit score.

What is an example of a credit hardship letter? ›

Because my income has dropped considerably I can no longer afford the terms of the original loan. As a loyal customer of your financial institution, I'd like to ask for the following: ▪ A lower interest rate amount of NO MORE THAN 6% ▪ Accept lower payments of $ _________ per month.

Does a hardship forbearance affect credit? ›

Loan forbearance is typically only granted upon request and isn't guaranteed. Some federally backed student loans contain special provisions that guarantee forbearance under certain specific criteria. If you're on a loan forbearance plan, it could be reported to the credit bureaus, and it may affect your credit.

How does hardship work? ›

Hardship personal loans are a type of personal loan that is designed to help you overcome financial difficulties. This type of loan is generally offered by small banks and credit unions, and has lower interest rates, lower maximum loan amounts, and shorter repayment periods than standard personal loans.

How much does hardship affect credit score? ›

The act itself of signing up for a hardship plan has no effect on your credit. However, once you enroll, your credit scores could be indirectly affected because of the way the program works. First, your credit card issuer may put a note on your credit reports regarding your participation in its hardship plan.

What happens if I claim financial hardship? ›

When you give a hardship notice (for the first time in any three-month period) the lender must stop further enforcement or legal action until it responds. This requirement does not apply if the creditor has a court judgment . Your creditor can ask you for more information. The information must be relevant.

How to show proof of hardship? ›

Provide supporting documents along with your hardship letter to help prove the legitimacy of your claim. Depending on your situation, you might submit documents such as an unemployment notice, medical bills, military orders or a divorce decree.

How do you write an explanation of hardship? ›

There are three main elements that should be included in every hardship letter: A description of the extreme hardship that would be caused if you were not granted relief. An explanation of why this hardship would occur. An explanation of how long this hardship would last.

How to prove financial hardship? ›

Explain your situation

the reason you are experiencing hardship, for example a letter from your employer or a certificate for an illness. your current income and other major financial expenses, such as other loans. what repayments you can afford.

What falls under a hardship loan? ›

What Is A Hardship Loan? A hardship loan is a type of financing that helps people dealing with a financial crisis caused by an emergency expense or an income shortfall. You can use a hardship loan to cover everything from a surprise medical or car repair bill to necessities like food and rent.

What are the negatives of forbearance? ›

Stopping payments before you've officially been granted forbearance could make you delinquent on your mortgage and have a serious negative impact on your credit history.

How long does a forbearance stay on a credit report? ›

KEY TAKEAWAYS. Mortgage forbearance may affect your ability to obtain a new mortgage loan or refinance your existing one, depending on your unique circ*mstances and loan type. Forbearance is always better than a foreclosure because missed payments stay on your credit report for only three years versus seven.

Does hardship show on credit report? ›

Your credit report will also include information that indicates you are in a financial hardship arrangement. This information will stay on your credit report for one year and then disappear. Your credit report will not include the reason for your financial hardship arrangement.

Do you pay back a hardship payment? ›

A hardship payment is a loan, so you'll usually have to pay it back when your sanction ends.

Does the credit card hardship program hurt credit? ›

Being in a credit card hardship program may temporarily negatively impact your credit scores. However, participation in these types of programs, as well as any missed payments, can still be reported to the three credit bureaus.

Are hardship loans a good idea? ›

Not being able to pay bills due to job loss or other unexpected circ*mstances is a difficult position to be in. If you're thinking about borrowing cash to stabilize your finances, a hardship loan is an option to consider.

How do you prove you are in financial hardship? ›

Provide supporting documents along with your hardship letter to help prove the legitimacy of your claim. Depending on your situation, you might submit documents such as an unemployment notice, medical bills, military orders or a divorce decree.

How do you bounce back after financial hardship? ›

To recover from a financial shock and to protect yourself from the impact of one before it happens, consider these guideposts from financial experts:
  1. Turn to your emergency fund or start one.
  2. Tailor your savings to type of emergency.
  3. Cut back on unnecessary expenses.
  4. Ask about hardship options.
Oct 26, 2023

Is a hardship withdrawal a loan? ›

A hardship withdrawal isn't a loan and doesn't require you to pay back the amount you withdrew from your account. You'll pay income taxes when making a hardship withdrawal and potentially the 10% early withdrawal fee if you withdraw before age 59½.

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