Is Debt Relief a Good Idea?
Millions of Americans are struggling to pay off high-interest credit card debt. The Federal Reserve Bank of New York reported that credit card balances reached $1.18 trillion in the first quarter of 2025. If you’re behind on payments, debt relief may help.
Debt relief is a way out of debt for less. It can make your payments more manageable, but it is not a quick fix. Nor is it the right solution for everyone. Before you choose this route, understand how each program works and its effects on your finances.
What Is Debt Relief?
Debt relief refers to several strategies that reorganize your debt to make it more manageable. You can consolidate debts into one payment, reduce your interest rate, or even forgive a portion of what you owe.
While debt relief can make your payments more affordable, it can hurt your credit score and involve fees.
Types of Debt Relief
Debt relief is not a one-size-fits-all solution. The best option depends on how much you owe and your specific financial situation.
Here’s a breakdown of three common types of debt relief:
Debt Settlement
Debt settlement is when you or an organization negotiates with your creditors to settle your accounts for less than you owe. You typically stop paying your creditors and pay the debt settlement company instead. Once you’ve saved up enough, they will enter into negotiations.
Having a portion of your debt forgiven is tempting, but it’s far from free. You will have to pay a performance fee of 15% to 25% of the enrolled debt or amount settled. The IRS considers forgiven debts over $600 as taxable income.
Settlement will also damage your credit, especially if you’ve stopped making payments. One missed payment can drop your score by 50 to 100 points. When you reach an agreement, your account will be marked as ‘settled for less.’ Credit bureaus consider this a negative mark, and it will remain on your report for up to seven years.
If you decide the risks are worth the savings, do your research to avoid scams. Check for licensing and accreditation. Search for reviews and ask: Is National Debt Relief legit? A trustworthy company will be transparent about risks and fees.
Debt settlement works best for those who’ve fallen significantly behind on payments, have unmanageable debts over $10,000, and are considering bankruptcy.
Debt Consolidation
Debt consolidation rolls multiple debts into one with a lower interest rate. It simplifies your payments and can reduce the total amount paid over time.
You can take out a debt consolidation loan and use the proceeds to pay off creditors or apply for a balance transfer card. The balance transfer credit card should have a low or 0% introductory APR. If you pay off your credit card balance before the introductory rate ends, you will save on interest.
While debt consolidation aims to reduce interest payments, you have to be careful. Loans may come with origination fees of up to 12%. They may also extend your repayment timeline. A longer repayment period means you could pay more interest, even at a lower APR.
Balance transfer cards are not free. Most come with a fee of 3% to 5% of the amount transferred. If you cannot pay off your balance in full before the promotional rate ends, you will incur interest at a higher APR.
Besides the fees, consolidation will impact your credit score. Applying for a new account will cause your score to dip slightly due to the hard inquiry. Consistently make your payments on time and reducing your utilization rate will improve your score.
Debt consolidation works best for consumers with good credit and a steady income who are struggling to manage multiple payments but haven’t fallen far behind.
Debt Management Plans
Nonprofit credit counseling agencies create debt management plans (DMPs) that help you effectively pay off debt. The agency works with your creditors to lower interest rates and waive fees. You make one monthly payment to the agency, which distributes the funds.
These plans typically take three to five years to complete and come with modest fees. Agencies usually charge an initial setup fee and a monthly maintenance fee. Depending on your income, you may be able to get them waived.
When you enroll in a DMP, you will have to close your credit accounts. Closing accounts can shorten your credit history’s average length, negatively impacting your score. As you make on-time payments through the plan, you will boost your credit. Having a positive payment history is more important than a long credit history.
DMPs are ideal for those with steady income but overwhelming unsecured debt who need help negotiating terms.
Who Should Consider Debt Relief
Debt relief may be worth it if you’re struggling with overwhelming unsecured debt like credit cards, medical bills, and personal loans.
Consider debt relief if:
- You cannot make minimum payments
- Your total unsecured debt equals half or more of your gross income
- You face financial hardship, like job loss, illness, or divorce
- Your debt is causing significant stress or impacting your well-being
- You are at risk of defaulting or have already missed payments
- Your only alternative is bankruptcy
- DIY strategies, budgeting, and cutting expenses haven’t helped
Debt relief can give you third-party support to reduce what you owe, but it takes time and consistent effort. Be ready to commit to repaying your debt over a few years.
Final Thoughts
When your debt load is unmanageable, then debt relief may be a way out. Be sure to explore all your options and understand the full consequences before you commit.
Once your debt is gone, avoid getting yourself in the same position again. Work with a credit counselor to create a realistic budget and start saving. When you have a safety net, you won’t have to rely on credit to get by.
