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Key takeaways
- Debt settlement is when the creditor accepts a lump sum payment that is less than the amount owed. Creditors will do this when the alternative is receiving no payment at all.
- Consumers can negotiate and settle debts on their own or they can work with a professional debt settlement company.
- Settling a debt does have a negative effect on credit scores. However, the impact diminishes over time.
If you have missed a lot of credit card payments and are watching your debt pile up it may feel like you’re never going to get out of credit card debt. But you do have options. From debt relief companies to credit counseling, there are ways to be debt free. One of these options is to settle your debt for less than you owe. While this can hurt your credit, it can do less damage than defaulting on your payments altogether and can help you get back on track. Before you decide to settle your debt, take a look at how the process works and see if it’s right for you.
Why Credit Card Companies Settle Debt
Credit card companies are well aware that if a consumer files for bankruptcy, they may well receive little to no repayment. At that point, it’s often more financially sensible for them to accept a reduced amount than to get nothing at all. If you’re considering bankruptcy, it’s a good idea to try to settle your debt first. You never know what your credit card issuer might be willing to negotiate.
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How Does Credit Card Debt Settlement Work?
Debt settlement is when you or a professional from a debt relief company negotiates with your creditor to allow you to pay a lump sum that is less than the total amount you owe. This lump sum can be significantly less, sometimes up to 50% or more off the original debt. Once agreed upon and the amount is paid, the remainder of the debt is forgiven.
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How to Determine if Settlement is Right for You
Assess Your Financial Situation: If you have some funds available for a lump-sum payment but not enough to pay off the entire debt, settlement might be a viable option.
Evaluate the Age of Your Debt: Older debts may be easier to settle because the creditor might see it as increasingly unlikely that they will get paid.
Consider the Alternatives: Compare debt settlement with other debt relief options such as debt consolidation or bankruptcy.
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How to Negotiate Credit Card Debt
Hire a Debt Relief Company: These firms act as middlemen between you and your creditors. They negotiate on your behalf and might be able to get a better deal due to their experience and relationships.
Do it Yourself: You can always try to negotiate your credit card debt yourself. If you choose this route, know exactly how much you owe and how much you can realistically pay before you call. Always begin by offering a lower amount than what you can pay. This gives you room to negotiate. Be respectful but firm. Explain your situation and why you cannot pay the full amount. Being honest and polite can go a long way. Once you’ve agreed on an amount, make sure you get the agreement in writing before making any payments.
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How Does Credit Card Debt Settlement Affect Your Credit Score?
Settling a credit card debt will almost always have a negative impact on your credit score. The account will typically be marked as “settled” rather than “paid in full,” which indicates to future creditors that you did not pay the original amount agreed upon. This can stay on your credit report for up to seven years. However, the negative impact diminishes over time, especially if you take steps to rebuild your credit through responsible financial behavior.
Final Thoughts
Dealing with credit card debt can feel overwhelming, but avoiding the problem will only make it worse. The good news is, you have many options for reducing your debt. There are debt relief companies, credit counselors, and the option to settle your debt yourself. Settling your debt with credit card companies can be daunting and has its risks, but it’s worth trying if you’re deep in debt. It can get you out of debt fast and do less harm to your credit than bankruptcy. Always weigh your choices, seek professional help if needed, and know it’s possible to get out of debt.
