Credit card companies offer forbearance programs to give struggling borrowers time to get back on their feet after a financial crisis. Some companies contact you with a forbearance offer if they notice you're falling behind on your payments, but it's best to contact your creditor before you miss payments. If you foresee financial difficulties on the horizon, contact the credit card company and ask what financial hardship payment programs are available.
Forbearance does not eliminate your debt, but it does postpone payments during a financial hardship, including unemployment or a medical emergency. Usually, you can push your payments back six months or more. Many of these programs resulted from the credit crisis that followed the 2007 housing crisis. With unemployment rising and homes losing value, the card companies realized card users needed time to regain their financial stability. By using forbearance programs, consumers could buy themselves some time if they fell behind in making payments or could not make regular payments going forward.
Typically, credit card companies charge off your credit card balance if you fail to pay for six months. This means they have given up on collecting the debt and take it off their books. You still owe the debt, but it is normally sold to a collections company for a percentage of its value. Your credit report continues to show the debt every month, which lowers your credit score. By taking advantage of a forbearance program, you can restructure your credit card loan and decrease interest rates, delay or eliminate future late or over-the-limit fees and lengthen repayment terms.
Forbearance programs also benefit card companies by allowing them to keep your loan on their books and potentially collect the balance once you improve your financial situation. If you end up declaring bankruptcy and don't pay off the card, the creditor loses the money. Because credit cards are unsecured loans -- loans not backed by collateral -- the creditor can't repossess and sell the collateral as it can with a car or house loan. This means the creditor loses the entire dollar value of your balance. When you spread that out over all the consumers carrying card balances, the companies have exposure to great risk if lots of borrowers default due to bankruptcy.
The forbearance offered by your creditors will vary from company to company, based on your financial situation, such as a temporary layoff, prolonged unemployment or medical emergency. They may also offer you a choice among different program options. It's best to have an idea of when you can start repaying again. During the forbearance period, your interest continues to accrue on your balance and eventually you will have to pay the full balance on your credit card.
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