Paying your credit card dues on time can be an overwhelming problem. However, you can find a solution to the problem with the help of debt settlement. Credit card debt settlement usually consists of negotiating with the card issuer to pay a reduced amount as full payment for the debt. This can be an excellent lifeline for people who are struggling to pay their credit card debt, especially during a season of financial hardship.
What Is Credit Card Debt Settlement?
Credit card debt settlement is a process that involves negotiating with the credit card issuer to allow you to pay a lesser amount in order to clear the outstanding debt. Unlike paying in full, where you repay the entire balance, or declaring bankruptcy, which has severe legal and credit repercussions, settlements provide a middle ground. You should only consider doing a debt settlement when you are unable to make full payments or facing a financial crisis caused due to a job loss or reduced income.
How Credit Card Debt Settlement Works
- Assess Your Outstanding Balance
Take a look at all your credit cards and assess all the pending amounts to understand the scale of your debt.
- Speak To Your Credit Card Issuer
Speak to your lender directly about the situation or get in touch with an organization that specializes in debt settlement.
- Request For A Reduced Payment Plan
Based on your financial capacity, request a reduced payment plan so that you can pay your dues with ease.
- Sign The Agreement
Finally, make sure that all the terms of the settlement are documented so that there are no disputes.
Best Tips For Success
- Always request terms that aren’t just easy to fulfill but also match your present financial condition.
- Maintain a record of all the payments to avoid any discrepancies.
- Clearly communicate your income, expenses, and hardships. Issuers are more likely to negotiate if they understand your financial limitations.
- A verbal agreement can be used against you. Get everything in writing before paying anything, including the settlement amount and terms.
- Be aware that debt settlement can still hurt your credit score. So take that into account when you consider the advantages of relieving yourself of debts.
- Some debt settlement companies will advise you to stop payments to force a negotiation with your creditors, but this could also lead to penalty fees or harm your credit score. So be cautious.
Does Credit Card Debt Settlement Affect Your Credit Score?
Yes, credit card debt settlement can have a substantial impact on the credit score. Here are a few reasons why:
- Impact on Creditworthiness
When any account is marked as “settled” instead of “paid in full,” lenders will know that you did not pay the full amount back to them, and their impression of you will change accordingly.
- Missed Payments
By settlement negotiations begin, you may already have lowered your credit score by missing payments.
- Credit Score Drop Right After Settlement
Your credit score may drop significantly when it gets marked as “settled,” and depending on how far back missed payments occurred and how valuable your credit score was already, the drop may be substantial.
- Reduced Credit Limit / Closed Account
In addition to the likely credit score drop after a credit card debt settlement, your lender may cut your available credit limit or close your account as a result of a settlement, which will increase or add to your credit utilization ratio. The credit utilization ratio is a significant portion of your score.
Long-Term Implications
A single negative entry from your settlement can show on your credit report for the next seven years. On the other hand, using your credit card responsibly after the settlement can help you build your credit score. Here’s how.
- Limited Access to Credit for a While
Due to your “settled” status, lenders may view you as a high risk and may deny your credit or loan applications for the long term, often for two years or longer.
- Higher Interest Rates on Future Loans
Even if your loan is approved in the future, you might receive a loan or credit card with a higher interest rate and fees due to your damaged credit history.
- Difficulty Getting Pre-approved Offers
You may no longer receive pre-approved credit card or loan offers as banks only want borrowers with strong/clean credit history, as they believe they are low risk.
Pros and Cons of Debt Settlement on a Credit Card
Pros
- Reduces the Total Amount Owed
Going for a debt settlement reduces your total settlement amount, which reduces your burden and provides relief.
- Prevents Bankruptcy
A debt settlement can also avert major consequences such as filing for bankruptcy.
- Provides Relief from Creditor Harassment
Reducing your total debt amount will also reduce persistent calls from creditors and ensure peace of mind.
Cons
- Negative Impact on Credit Score
Not being able to pay dues on time can lead to a lower Credit Score. It may also lead to a ‘settled’ mark on your report card.
- Tax Implications – The forgiven debt amount could be considered as taxable income.
Tips for Successful Settlement of Credit Card Debt by Negotiations
- Make the Approach with Your Lender Directly
Be open and honest about your current financial situation.
- Supply the Required Documentation
Present income evidence, expense breakdowns, and any other relevant information.
- Propose a Fair Offer
Regardless of whether you pay a one-time payment or create a repayment plan, make sure it is something that you can afford given your financial condition.
- Be Respectful and Persistent
Negotiating for a settlement takes time, patience, and respect, so be respectful in all communication.
- Seek Professional Advice
Always get in touch with a few financial advisors and credit counsellors to make sure that you get a good settlement.
Alternatives to Debt Settlement
- Debt Consolidation
If you don’t want to go for debt settlement, consider debt consolidation. This is where you will need to use your personal loans or balance transfer cards to combine and manage your debt at a much lower interest rate.
- Debt Management Plan (DMP)
Here, you will need to work with a credit counseling agency to create a structured repayment plan so that you can pay your debt on time.
- Hardship Programs
You may also request your credit card issuer to provide you with temporary relief.
- Credit card debt settlement can be a viable solution for those grappling with overwhelming debt. While it affects your credit score and carries potential tax implications, it offers a path to financial relief and avoids the severe consequences of bankruptcy. Evaluate all available options and seek professional advice to determine the best course of action for your situation.
FAQs
Q: Does credit card debt settlement affect your credit score permanently?
No, the impact isn’t permanent, but negative entries from settlements can remain on your credit report for up to 7 years.
Q: Can I negotiate the settlement amount myself?
Yes, you can negotiate directly with your credit card issuer, though hiring a professional may improve outcomes.
Q: What are the tax implications of credit card debt settlement?
The forgiven debt may be taxable. Consult a tax advisor to understand how it applies to your situation.
Q: How long does it take to recover from a settled credit card debt?
Recovery time depends on responsible credit behavior post-settlement. Many see improvements within a few years.
