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Explore How Debt Relief Can Increase Your Loan Approval Odds

February 7, 2025

Debt is a problem. The more money you owe, the less likely lenders are to approve new loans. When you carry high balances, your credit score will suffer, and it will be harder to get a credit card.

What can you do about it? Repay your debts. We know that’s easier said than done. Many Americans are still relying on credit to cover basic necessities.

One solution is debt relief. It can help you get out of debt faster and for less. Let’s go over how debt relief can help and what programs are available.

What is debt relief?

The term debt relief refers to various strategies for getting out of debt. The overall goal is to change the terms or amount of your debt so that payments are more affordable. The more affordable your payments, the faster you’ll become debt-free.

Debt relief may include reducing your interest rate, altering your repayment schedule, negotiating to settle for less, or wiping out debts entirely. There is a whole host of solutions to reduce your debt burden. We’ll go over each in detail so you can find the right strategy for you.

When to consider debt relief

Debt relief is not right for everyone. Before diving in, see if it’s the right fit.

It is time to consider debt relief if:

– You have more unsecured debt (credit cards, medical bills, personal loans) than you can afford to repay in three to five years

– Your debts equal half or more of your gross income

– You are behind on debt payments

– You struggle to afford your monthly payments

When you reach this point, it’s time to look for ways to reduce your burden. Even if you can afford what you owe, options like consolidation, can help you save on interest and pay off debts faster.

Debt relief is not going to help if:

– Your debt is secured – mortgage, car loan – or it is student loans

– You are not ready for a long-term commitment to repaying debt

– You continue to add to your balances

Debt relief only works with unsecured debts and takes time to see it through. An important part of the process is not adding to your debt. Or you’ll end up right back where you started.

What are your debt relief options?

There is no one-size-fits-all debt relief solution. The right option depends on how much you owe, your interest rates, and what you can afford to pay.

Popular solutions are:

– Debt consolidation loans

– Balance transfer credit cards

– Debt management plans

– Debt settlement

– Bankruptcy

Each solution comes with its own risks and rewards. Choose the one that makes the most sense for you.

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Debt consolidation loans

Debt consolidation is when you combine multiple debts into a single monthly payment. It simplifies your finances. You only have one bill to pay each month, so you are less likely to miss a payment and incur late fees.

A popular way to consolidate debt is to take out a debt consolidation loan. You receive a lump sum of money to use to repay your creditors. Ideally, your new loan will have a lower annual percentage rate (APR). Generally speaking, personal loans have lower APRs than credit cards. Secure a loan with a low APR, and you will save money on interest.

The key is to make timely payments. As you pay on time, your credit score will improve. You will gradually reduce how much you owe and save money.

One tip is not to close your old credit card accounts. Keep them open, but don’t charge anything until you’re out of debt. Maintaining old accounts can help improve your credit score.

Balance transfer credit cards

Balance transfer cards are another way to consolidate credit card debt. You apply for a balance transfer card with a 0% promotional APR. Transfer your outstanding balances onto the card. You won’t have to pay interest for the promotional period – usually 12 to 18 months. Balance transfer cards are a great way to save money on interest, get out of debt faster, and reduce your monthly payments to one bill.

A few words of warning. Be sure you can pay off the card before the promotional period ends, or you’ll have a higher APR. These cards usually only apply the 0% APR to the transferred balance. If you make new purchases on the card, you will be subject to a higher APR.

Credit Counseling

Nonprofit credit counseling agencies offer debt management plans (DMPs). You work with a credit counselor who negotiates with creditors to secure reduced interest rates and waived fees. Each month, you make an affordable payment to the agency. The agency will distribute the money to your creditors according to an agreed-upon schedule.

DMPs work similarly to debt consolidation. You end up with one affordable monthly payment and a reduced interest rate. The difference is that you get the guidance of a credit counselor who can help with budgeting and keeping you on track. Plus, your credit score isn’t a factor in securing a lower APR.

While a DMP is generally a great choice and is low-risk, there are a few catches. Most creditors will close your accounts. You will have to live without credit for the three to five years it takes to complete the plan. 

Before enrolling in a debt management plan, make sure you can afford to pay something each month. If you miss a payment, you may be kicked out of the program.

Settle your debts

Debt settlement is when you negotiate with creditors to pay less than you owe. You can do this yourself or work with a debt settlement company. Many consumers work with companies since they have experience negotiating with creditors.

When you enroll in a debt settlement program, you will be asked to put money aside in a separate savings account. When you have saved enough to negotiate a settlement, you or the company call up your creditors and offer a lump-sum payment. If your creditors agree, you pay the sum, and the remainder of your debt is forgiven. Always get the agreement in writing.

Settling debt sounds excellent on paper, but it comes with serious detractions. For your creditors to be willing to accept a reduced amount, you will have to be behind on your payments. Missing payments will hurt your credit score and increase the amount you owe. You’ll be charged late payment fees, and interest will continue to grow. The biggest catch may be that there is no guarantee your creditors will settle. Some won’t even talk with debt settlement companies.

Debt settlement is best for people who can make a lump sum payment, are already behind on bills, and need immediate relief.

File for bankruptcy

Bankruptcy is a last resort, used when other methods fail and you cannot pay what you owe. It can discharge your unsecured debts and give you a fresh start.

Chapter 7 bankruptcy or liquidation bankruptcy is the most commonly used form. It erases most unsecured debts in three to four months if you qualify. To qualify for Chapter 7, your income must be below the median for your state and family size. Otherwise, you’ll have to file for Chapter 13.

Chapter 13 bankruptcy is when you enroll in a three to five-year court-approved repayment plan. Once you finish the plan, all remaining unsecured debts are discharged.

A bankruptcy filing will stay on your credit report for seven to ten years. It will impact your score and ability to secure loans or credit cards. Speak to a bankruptcy attorney first. Most initial consults are free of charge.

How can debt relief help you get a loan?

Debt relief can help you manage your debt more effectively. As you pay off debt, you improve your financial standing. In turn, lenders may be more willing to offer you a loan.

Improves your credit score

A good credit score is key when getting a loan with favorable terms. Specific debt relief programs help you improve your credit as you repay money.

For example, when you enter a debt management plan or consolidate debt with a loan or card, you streamline your debts into a single monthly payment. The single payment is often lower and reduces your chances of missed payments. As you consistently pay on time, your credit score will improve. On-time payments are the best thing you can do to improve your score.

Paying off debt will also reduce your credit utilization ratio – or how much you owe versus how much available credit you have. The lower your ratio, the better your credit score. For this to work, you must keep old credit card accounts open. That can be tricky if you enter into a DMP.

Lowers your debt-to-income ratio

Your debt-to-income ratio, or DTI, is another crucial factor that lenders consider. Your DTI shows lenders how much of your income goes toward paying debts. Most lenders require a DTI of 43% or less.

Debt relief is all about reducing your burden. As your debt lessens, your debt-to-income ratio improves. More of your income is free, making you a better candidate for a loan.

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What to know before you apply for debt relief

While debt relief can make repayment more manageable, it comes with risks and consequences. Here’s what you need to consider.

Watch out for scams

Not all debt relief companies are legitimate. Some may promise too-good-to-be-true results but leave you worse off. 

A few red flags to be wary of include:

– Demands payment before your debts are settled

– Promises that are too good to be true

– Any guarantee, especially that you will settle for a fraction of what you owe

– Assurances that they can stop all debt collection calls and lawsuits

– A lack of transparency

– Requests for personal or banking information

– High-pressure tactics to get you to enroll immediately.

Always research a company or credit counselor before committing. Check the Consumer Financial Protection Bureau (CFPB) for consumer complaints. Read reviews on the Better Business Bureau (BBB) to verify the company’s reputation. Do your due diligence and check with your state attorney general’s office to ensure the company is legitimate.

Proper certification

Before choosing a debt relief company, check that they have proper certification. A certified company will have trained professionals to help you get out of debt.

Nonprofit credit counseling agencies should have certified credit counselors. Look for affiliations with reputable organizations, such as the National Foundation for Credit Counseling (NFCC) and the Financial Counseling Association of America.

If you’re interested in a debt settlement company, check that they have the International Association of Professional Debt Arbitrators (IAPDA) certification. The IAPDA Certification is widely recognized and considered the gold standard for training and qualification. Certain states require it for debt settlement companies to operate.

Being certified ensures that the company follows ethical standards and has a proven track record. If they’re not certified, take your business elsewhere.

Potential fees

Debt relief programs often come with fees. Make sure you understand all the potential costs so you’re not surprised when the bill comes.

Different companies have different fee structures. For instance, debt management plans typically have a setup charge and a monthly fee. These fees may be waived depending on your income level. 

Debt consolidation loans may have an origination fee, prepayment penalty, and late fees. Balance transfer cards charge a transfer fee of 3% to 5% of the balance transferred. Do the math to make sure you’ll save more in interest than you’ll pay in fees.

Debt settlement companies charge a performance fee of 15% to 25% of the enrolled debt. Say you owe $10,000. You may pay a 20% fee of $2,000 once they settle. The settlement company may also charge fees for opening and maintaining a savings account in which you make monthly payments. Plus, you may owe taxes to the IRS on settled debts.

Be sure to ask about all potential fees upfront. Look for a company that offers a clear and affordable plan. It should fit your budget without any hidden costs.

Interest rate reductions

A lower interest rate can save you thousands and speed up repayment. Don’t jump at the first offer. Always compare potential rates to make sure you get the best deal. And that it will save you money.

For example, you may be offered a debt consolidation loan with lower monthly payments but a longer repayment period. While the loan may make your monthly payments more affordable, you’ll likely pay more in interest over the life of the loan.

Repayment timeline

Debt relief takes time. It requires consistent, on-time monthly payments, often for years. Debt management plans are three to five years on average. Debt settlement typically takes two to four years. Consolidation with loans or cards is often faster. How long the program lasts depends on the amount you owe, your creditors, and your financial situation.

Many people don’t complete the programs because they can’t commit.

Frequently asked questions

1. Is debt relief legit?

Yes, legitimate debt relief options exist. Always research companies carefully. Check for accreditation and verify their reputation with consumer protection agencies.

2. How do I qualify for debt relief?

Qualification depends on the type of debt relief. Debt settlement often requires you to owe over $10,000 in unsecured debts. Consolidation with a loan or balance transfer offer usually requires good to excellent credit. Nonprofit credit counseling is available to most, but you must have an income to qualify for a DMP. Bankruptcy has income and debt limits as well. Consulting a reputable financial professional can help determine the best path.

3. How can I pay off $10,000 in credit card debt?

First, pay more than the minimum each month and stop adding to your balance. Try to consolidate your debt with a personal loan or balance transfer card or negotiate a lower interest rate with your creditors. Consider credit counseling if you struggle to make payments.

4. What debts cannot be erased?

Debts that cannot be erased include student loans (except in rare cases), child support, alimony, most tax debts, court-ordered fines, and secured debts like mortgages or auto loans.

5. Can you still use your credit card after debt settlement?

The creditor will most likely close the account once you settle the balance. You will need to apply for a new card. Getting a credit card will be challenging due to the damage to your credit score. Your best bet is to get a secured card and use it responsibly to build credit.

Bottom line

Debt relief can help get you out of debt efficiently and for less. When you enroll in a program, you need to stick with it. The program may be tough, but it will serve you well in the long run. You can start a new debt-free life with better finances.

As you pay off your debt, do not add to your balances. Continuing to charge items will set you back to where you started. It can be challenging, especially if you rely on credit to get by. Remember, it’s not forever. Once you’re debt-free, you’ll have more money to spend as you like.

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About the author

Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor’s credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor’s degree in journalism and an MBA.

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