How Does Credit Card Settlement Work?

Making at least the minimum credit card payment each month is ideal. However, life can get in the way sometimes, and if you miss a payment for 30 days, your debt becomes delinquent or overdue.

Missing credit card payments is a common issue many people face. Reports show that the rate of delinquent credit card debt increased to 3.10% in the last quarter of 2023. If your overdue debt keeps growing each month and you don't have enough income to pay back the full amount you owe, credit card settlement could be a helpful option.

With credit card settlement, the credit card company agrees to forgive or erase part of the debt you owe them in exchange for you paying a portion of the total. You can make this partial payment either as one lump sum or through several smaller payments over time.

Credit card companies may accept a settlement deal if they think there's a chance they won't get the full payment from you otherwise. You'll need to prove undeniably that you cannot repay the total balance owed, even with a modified payment plan. Strong negotiation skills are key. While you can try negotiating directly, it's often better to work with a verified, reputable debt settlement company.

Why Should You Try Credit Card Settlement?

Opting for credit card settlement can help you:

1. Reduce monthly payments - Settle your debt and get relief from high-interest monthly credit card payments by paying smaller monthly payments, either once or in a series of payments.
2. Decrease your debt - Reduce your outstanding debt balance partially by settling credit card debt, paying relatively less than what you originally owed.
3. Avoid bankruptcy - Credit card settlement is less harsh than bankruptcy on a debtor's finances and stays on the credit report for less time. If you are in a dire financial situation with no stable income, settling your debt is better than filing for bankruptcy.
4. Get quick debt relief - Successfully negotiate with your credit card issuer to cut down your outstanding debt into a smaller payment and get rid of this debt quickly.

Note that the debt settlement process comes with risks, such as potential tax implications and a significant drop in credit score. This article will cover credit card debt settlement in more detail, understanding how it works, who should try it, and more.

The Credit Card Settlement Process

The process of negotiating credit card debt can be daunting, as there is no guarantee of how the creditor will respond. Whether you seek professional help with debt settlement services or do it yourself, proper preparation is essential.

Here's how the credit card settlement process typically goes:

Research your financial condition

• Check online bank accounts or contact the card issuer for the current balance and interest rate.
• Gather past statements and calculate the total amount owed.

Explore your options

• Determine how much you can realistically pay for settlement from savings, emergency funds, etc.
• Choose the type of settlement: lump sum, hardship agreement, or workout settlement.

Verify your debt amount

• Contact the card issuer's debt settlement, hardship or loss mitigation department.
• Explain the situation and validate the accurate debt amount before negotiating.
• If debt went to collections, request written validation.

Negotiate a settlement

• Tell the collector/issuer you want to settle the debt.
• State the amount you can pay and provide proof of financial hardship.
• Mention you're considering bankruptcy but want to avoid it.
• Be firm but respectful, don't accept the first offer right away.

Obtain a written agreement

• Request a copy of settlement terms in writing once agreed.
• Verify it shows the exact amount owed, due date, and "paid in full" status.
• Ensure it states creditors will report properly to credit bureaus.
• Get this documentation as proof in case of future disputes.

Complete the payment

• Pay the settlement amount per the agreed terms after receiving the written agreement.
• Keep records of payments like receipts or bank statements.

Monitor your credit status

• Review credit reports from all three major credit bureaus to ensure the settlement is reported correctly.
• If any mistakes are found, dispute with respective credit bureaus.

Remember:

• The settlement will be reported to credit bureaus after payment, potentially causing a major credit score drop for up to 7 years.
• Beware of scammers posing as debt settlement firms - check reviews or consult non-profit credit counselors.
• During the negotiation process, only mention that you are considering bankruptcy filing if you really mean it. An issuer may close the account or freeze the credit limit at this point.
• If the card issuer charges off the account before accepting the settlement, the account will be permanently closed.
• Forgiven principal over $600 may count as taxable income - you may get a 1099-C form from the company.

While navigating the debt settlement process on your own can be challenging, staying well-prepared and organized can help you avoid unnecessary stress. Consider seeking support from trained financial professionals or nonprofit credit counseling agencies for guidance.

Impact of Credit Card Settlement on Credit Scores

Before proceeding with the credit card settlement process, your credit score will likely be low due to past default debt. After the settlement, the score might drop another 100 points. While you will get some financial relief after settling your debt, you must focus on rebuilding your credit. Additionally, you may incur other dues, such as service fees from the debt settlement agency, late fees from lenders, and taxes from the IRS on the forgiven debt amounts.

The extent to which your credit score drops after a debt settlement agreement depends on several factors:

• Settlement Amount - The larger the difference between the settled amount and the original balance owed, the more it can negatively impact your credit score.
• Current Credit Score - Those with higher credit scores may experience a more substantial drop compared to those with lower existing scores.
• Settlement Reporting - Your score will likely decrease when the credit card company reports the settled debt to the three major credit bureaus. However, the drop may be less severe if reported as "settled in full" rather than "paid in full for less than the full balance."
• Other Credit Factors - Your overall payment history timeline, credit mix across different account types, and length of credit history also influence how much your score changes.

How to Build Credit After Credit Card Settlement

After the expected score drop, you can improve your credit score over time by following a strict financial plan:

• Limit credit card usage to under 30% of available credit or avoid using them altogether.
• Pay all bills and loan payments on time every month.
• Use secured credit cards to help rebuild your positive payment history.
• Regularly check credit reports from all three bureaus and report any errors.
• Maintain a diverse mix of credit types, as this accounts for 10% of your score calculation.
• Make responsible financial choices and follow a budget to avoid accruing new debt.
• Seek advice from non-profit credit counselors for debt management plans or personalized guidance.

With consistent on-time payments and controlling debt levels, you can improve your debt-to-income ratio and creditworthiness over time.

Mistakes to Avoid in Credit Card Settlement

During the settlement process, cardholders may make mistakes that can jeopardize success. Avoid these common errors:

1. Continuing Credit Card Use

   • Explanation: Using a card with an outstanding balance during negotiations signals irresponsibility.
   • Instead: Avoid using that card for 3-6 months before requesting a settlement to demonstrate commitment.

2. Sending Cease and Desist Too Soon

   • Explanation: Doing this prematurely risks creditors taking legal action against you.
   • Instead: Communicate calmly, explain finances, and provide documentation. Only send a cease and desist if they become abusive.

3. Making False Bankruptcy Threats

   • Explanation: Creditors may call your bluff and freeze accounts if you don't follow through.
   • Instead: Make a realistic settlement offer based on your actual financial situation. Only mention bankruptcy if truly considering it.

By avoiding these pitfalls and taking alternative courses of action, you can increase your chances of successful credit card debt settlement while minimizing legal and financial risks.

Alternative Methods to Remove Credit Card Debt

Besides the debt settlement process, there are other strategies you can use for debt relief:

To choose the right debt relief alternative, consider the following factors:

• Your current credit score and total outstanding debt.
• Eligibility for new credit and stable income for timely payments.
• Your financial goals and available time to focus on debt repayment.

Consult a qualified financial advisor or credit counselor for personalized advice about your debt situation. They can help you understand your options and make an informed decision.

How to Choose the Right Credit Card Settlement Company

When working with a debt relief or settlement company, it's crucial to know which team to trust.

Consider these factors when selecting a company:

Transparency in Services and Costs

• Look for companies transparent about their settlement process and all associated costs (upfront, settlement, and other fees).
• Reputable firms inform clients upfront about the potential risks of debt settlement and provide clear explanations.
• Example: A transparent company clearly outlines a fee structure, like charging a percentage of the total enrolled debt or amount settled.

Proper Accreditation

• Verify if the company is accredited by the International Association of Professional Debt Arbitrators (IAPDA) or the American Fair Credit Council (AFCC).
• Accreditation shows commitment to industry standards and best practices.
• Example: Look for accreditation logos and seals on the company website and cross-check with the accrediting organization's directory.

Customer Experience and Reviews

• Check verified customer reviews on the company's website and sites like Trustpilot or Better Business Bureau.
• Analyze patterns of praise and complaints to gauge overall performance and customer satisfaction.
• Research the company's average settlement rates and client success rates for completing debt settlement.
• Example: Consistently positive reviews and high success rates may indicate a reliable, effective debt settlement partner.

Researching and Verifying Credibility

• Contact your state attorney general's office to inquire about prior complaints against the company.
• Check with the Consumer Financial Protection Bureau (CFPB) for any existing complaints or actions.
• Read customer feedback on reputable review sites and forums to gauge reputation.
• Research the company's Better Business Bureau (BBB) rating and any unresolved complaints.
• Example: Minimal complaints, high BBB rating, and positive customer feedback signal a credible debt settlement partner.

By thoroughly evaluating transparency, accreditation, customer experience, and credibility, you can make an informed choice when selecting a debt settlement partner for your credit card debt.

Conclusion

Credit card debt settlement offers a potential solution for those struggling with overdue payments and in need of debt relief. Through this process, the credit card issuer may agree to accept only a portion of the outstanding principal balance as full payment. However, it's important to note that any forgiven debt amount over $600 is generally considered taxable income by the IRS.

To successfully navigate debt settlement, carefully assess your current financial circumstances, gather all required documentation, and approach negotiations in good faith. Be aware of the potential risks involved and take care to avoid common mistakes like continuing to use the card or making premature legal threats. Exploring other debt-relief options and seeking guidance from credit counseling professionals or reputable settlement firms can also be beneficial.

Once the debt is settled, the primary focus should shift to rebuilding your credit score over time through responsible financial management like making payments on time, keeping credit utilization low, and developing a diverse credit mix. With diligent effort and smart money habits, regaining solid financial footing is achievable after resolving outstanding credit card balances.