Consumer Tips for Settling Credit Card Debt

Consumer Tips for Settling Credit Card Debt

August 6, 2020         Written By Heaven Speirs

If you feel overwhelmed by credit card debt, you have the option to settle with your card provider for a reduced amount. This eliminates the burden of the debt, but it may negatively impact your credit score. Before you decide to settle your credit card debt, you need to know all the facts. Here are some consumer tips for credit card debt settlement, along with alternative solutions to explore. 

 

What Is Credit Card Debt Settlement?

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Credit card debt settlement involves paying a reduced lump sum to cover your outstanding balance. For instance, if you owe $3,000 on your credit card, you may be able to settle for a payment of $2,000. You can choose to negotiate the settlement on your own or work with a debt settlement company. This is a third-party who acts as a negotiator between you and the card issuer. The debt relief agency discusses payment options with the card issuer to come up with an agreeable settlement amount. You pay that, plus a small fee from the settlement company.

If this sounds too good to be true…it is. There are significant consequences that come with debt settlement, and you need to be prepared for those before making this decision. There are many other ways to manage credit card debt, and those options have fewer consequences. Keep reading. We’re here to help! 

 

Pros and Cons of Settling Your Credit Card Debt

Credit card debt settlement is not a ‘get out of jail free’ card. The consequences often outweigh the benefits. Fully weigh out the pros and cons before deciding what is best for you.

Pros of Credit Card Settlement

  • Avoid bankruptcy
  • Eliminate the stress of unmanageable credit card debt
  • Stop interest from accruing on your account
  • Lower your debt amount
  • Stop debt collection attempts, including calls from collection agencies

Cons of Credit Card Settlement

  • You will most likely see a drop in your credit score
  • The settlement could hurt your score for several years
  • Settling may prevent you from getting a loan or credit card in the near future
  • There is no guarantee that the card issuer will agree to negotiate a settlement
  • If the forgiven debt is more than $600, you must also pay income taxes on the amount that is forgiven by filing a Form 1099-C
  • You may incur interest charges, late payment fees, and other penalties while pursuing a settlement

 

Why Are Credit Card Issuers Willing to Settle for Less Money?

Payment delinquencies are major problems for credit card issuers. They must write down a balance to zero once a person has been delinquent for 6 months, even though the cardholder still owes money on their card. The issuer will try to collect the debt through a collection agency, but they have to show the loss on their books. As of the first quarter of 2020, the credit card delinquency rate in America is 2.73%. 

Credit card settlement gives card issuers a chance to recover some of their lost funds. They will still lose money in the end, but the damage will not be as significant. Many debt collectors, lenders, and credit card companies are willing to negotiate settlements with their borrowers in order to cut their losses. The lenders also save money in debt collection efforts by choosing to settle instead of pursuing the full payment.

 

Before You Settle, Consider an Installment Plan

You don’t have to jump immediately into debt settlement. Instead, you can discuss your situation with the lender and work out a payment plan. Most card issuers are more than happy to work out an installment plan if it means recouping all of their losses, not just a portion of them. A payment arrangement will also keep your account in good standing, thereby protecting your credit score. 

Examine your finances, and come up with a monthly payment you can handle. There is no sense in agreeing to a payment arrangement if you cannot handle the payment amounts. In order to make a dent in your credit card debt, the installment amount needs to be more than your minimum payments. 

Ask your issuer to lower your rate and waive your fees. This could significantly improve how much of your debt you can pay off. The lender may be hesitant to grant these leniencies, but it won’t hurt to ask. If the first person you speak with can’t help lower your rate or make adjustments to your account, ask to speak with a supervisor. Persistence may be necessary to find a person who can or will help you. Explain that you are in debt, the steps you are taking to repay it, and what you can pay today. This gives you more leverage in negotiating. Document all conversations, including the person with whom you spoke, the date, time, and the results.

You can also ask about forbearance if you have recently suffered a financial hardship. Most credit card companies are willing to make adjustments if you have experienced a death in the family, job or income loss, natural disaster, or another unexpected difficulty.  

 

Take Action Before Your First Missed Payment

If you are in danger of missing a payment, contact your creditors as soon as you realize you have a problem. The sooner you contact them, the more willing they may be to work with you. You may ask about an installment plan at any time, but it is easiest to achieve before the account goes into collections.

 

Proven Ways to Reduce Credit Card Debt

Another alternative to credit card debt settlement is to reduce your credit card debt to a manageable level. This gives you a chance to pay the debt over time without damaging your credit or owing more in taxes. Here are some proven ways to lower your credit card debt. 

Pay More Than the Minimum Payments

Paying just the minimum amount each month on any type of debt, especially high-interest debt, is never a good idea. Interest adds up extremely quickly when you’re dealing with credit cards, mortgages, and car payments, so pay more than the minimum amount each month. You will likely save thousands of dollars over the life of the debt just by paying more than the minimum. Evaluate what you can afford to dedicate to your credit card each month, and you’ll start to see noticeable declines in the amount owed.

Ask for a Lower Interest Rate

In a recent study, 81% of cardholders were able to secure a lower APR just by asking for one. Ideally, you should several months of positive payments on your account before requesting a lower interest rate. Once you show the card company that you are managing your debt, they may grant you a reduced APR. 

Make Sacrifices to Free up More Income

Do you have more in monthly payments than you have in income? Are you paying more in interest than your principal? If so, it may be time to make some tough sacrifices. Get rid of your streaming services for a few months. Meal prep instead of eating out. Commit to a spending freeze one week each month. Use a program like Truebill to negotiate lower cable, internet, and phone bills. Put the extra money you now have toward your credit card debt, and enjoy the stress relief that follows. 

Consolidate Your Credit Card Debt

Consolidating to a low-interest loan or balance transfer credit card could make debt payment much more feasible. With a balance transfer card, you transfer the balance from one credit card to another. The card will most likely have a lower interest rate than your existing card, reducing the fees you incur each month. There will be a balance transfer fee on the card, which impacts how much money you can save with this option. Learn more: Can Balance Transfers Save Me Money Even with a Transfer Fee?

Pay Your Credit Card Bills on Time Each Month

Perhaps the easiest way to reduce your credit card debt is to make your payments on time each month. Late payment fees add unnecessary expenses on top of your accruing interest. Even if you can pay the minimums, you’ll at least avoid the late fee by doing so. You can make an additional payment during the month to reduce your principal balance. 

Make Credit Card Payments Every Two Weeks

By making a payment every two weeks instead of once a month, you squeeze an entire extra payment into the year. There are 52 weeks in a year, resulting in 26 half-payments. That equates to 13 monthly payments, rather than the standard 12 payments for the year. If you get paid every two weeks, dedicate a portion of each paycheck to your credit card. 

Cancel Subscriptions You No Longer Need

Are you still paying $5 a month for a music app you don’t even use? We’ve all been there, usually out of pure laziness. Those tiny subscription payments add up to a ton of wasted money each year. That’s money that could be going to your credit card debt! Carefully review all of your monthly transactions, and eliminate the ones you simply do not need.

 

Should I Work with a Credit Card Debt Relief Agency?

If you decide to settle your credit card debt, you have the option to work directly with the credit card company or settle through a debt relief agency. The agency will charge a fee for their services, but they handle all the negotiating for you. Some agencies will charge a fee upfront, while others wait to collect the fee after reaching a settlement. 

In most cases, you will save money by negotiating directly with the credit card company. However, you have to factor in the time it will take to complete those negotiations. You may have several long phone calls before reaching a settlement, and the card issuer will try to persuade you to pay the highest amount possible. Commit to what you can reasonably pay and remain diligent. Hopefully, you will reach an agreement that works for everyone. 

 

How to Deal with Debt Collectors

Debt collection is an industry with an aggressive reputation, known to sometimes use strong and harassing tactics in an attempt to collect a debt that is past due. According to the Consumer Financial Protection Bureau, approximately 28% of consumers have a debt reported to a collection agency on their credit file. If you’re tired of the relentless letters and phone calls, you’re not alone. Thankfully, there are steps you can take to reduce stress from debt collection. 

When Does a Debt Get Reported to a Collection Agency?

Your credit card minimum payment is due at least 21 days after you receive your bill. If you pay off your balance in full during the grace period, you will not incur interest on the bill. If you fail to make the minimum payment by the due date, your credit card issuer may report the late payments. Sometimes they will wait until the account is 60 days late before reporting to the credit bureaus. 

If you don’t make your minimum payment in 60 days, your account is turned over to the collections department and the delinquency is reported on your credit report. If your account is 90 days past due, your card issuer will most likely close your credit card account, charge off the debt, and sent it to a collections agency or a third-party debt collector. 

Should I Pay the Debt Collector or the Credit Card Company?

Contact the credit card company first to see if you can work out an installment plan or debt settlement. They may tell you that the debt has been sold and give you the number for the collection agency. This means that another company purchased your account, and now you must pay them, not the card issuer. The credit card provider has already received money from the debt collector. 

The debt collector will contact you through phone calls, emails, and letters. Before you make a payment, verify the amount and the creditor. If the amount seems wrong or you have never heard of the account in question, don’t make a payment. As an additional precaution, you can contact the agency listed on your credit report. You are initiating the phone call, not answering a call from an unknown source. This ensures that you are paying the right company for the debt and not a scammer making false claims.

Ask the Debt Collector to Stop Contacting You

You may submit a letter in writing asking the debt collector to stop contacting you. This will not eliminate the debt, but it will stop the harassing phone calls. You should receive a letter back from the collector verifying that they will stop calling you. The letter may also indicate that they are suing you for the debt. 

What to Do If You’re Being Sued for Credit Card Debt

If you receive a summons to appear in court, do not ignore it. Failure to appear in court counts as an automatic victory for the collector. If the debt collector wins the case and receives a judgment, it can seize assets or garnish wages to pay off the debt. The judge could also create a payment plan that may or may not be feasible for you. 

Contact the debt collector before the court date to create a payment arrangement or settle for a reduced amount. The agency wants to avoid court if possible because it’s one more expense for them. If you can pay a portion upfront and work out installments for the remainder, try that. There is no harm in making a last-minute effort to avoid court. 

Note that there is a statute of limitations to sue for credit card debt, and if the date is passed, you can have the case dismissed. This limit is set by the states and varies from three to ten years. It is up to you to know and prove this. The debt collector can still attempt to collect on debts past the statute of limitations, but your dispute can negate the claims. 

If none of those efforts resolve the matter, you will need to show up for your court appearance and plea your case. You might work through a neutral third party to negotiate a settlement, or the judge may simply rule in your favor or the collection agency’s favor. If you lose the case, you will have a sum of money to pay – usually your debt amount plus fees and court costs. 

 

How Long Does Delinquent Credit Card Debt Remain on My Credit Report?

Information about a delinquent account remains on your credit report for seven years from the date you first missed a payment. However, the effects of the delinquency may last longer than that, depending on how the case is resolved. The credit card issuer may charge off the debt and send you a 1099-C. The debt may also pass through several collection agencies before it officially falls off your credit report. To avoid these long-term issues, try to settle with the credit card company, make a payment arrangement, or consolidate your debt to a low-interest loan. 

 

What to Do After Credit Card Debt Settlement

After settling your credit card debt, you will need to rebuild your credit score. The sooner you do this, the sooner you can overcome the negative impact of debt settlement. Here are some ways you can rebuild your credit right away:

  • Keep up with your existing debt payments. Make on-time payments for all the credit cards and loans you have remaining. If you can afford to make higher payments for those lines of credit now, do so. You’ll need to keep your accounts in good standing, now more than ever. 
  • Avoid unnecessary new debt. Turn your focus to paying down your existing debts or saving for the future. Any new debt you incur puts you at a higher risk of delinquency later on, and it may limit your ability to make your payments on time. 
  • Consider opening a credit builder loan or secured credit card. A credit builder loan is a loan in which the lender does not provide any money upfront. Instead, the lender deposits money into a savings account after you make each monthly payment. With a secured credit card, you provide the funds for the card upfront. Both options can boost your credit score with on-time monthly payments. 
  • Keep your other credit cards open if there are no annual fees. Having a long credit history will boost your credit score. Canceling your credit cards could hurt your score even more. However, if the annual fees are beyond what you can afford, canceling your card may be the smartest option financially.
  • Make financial sacrifices to pay off your debts quickly. You might have to live on a frugal budget for a year, but that will be worth the stress relief of minimized debt. It’s about making small sacrifices now so you can reap the rewards later on. 
  • Turn saving money into a monthly bill. Seriously, charge yourself a certain amount of money to save each month. You could even have the savings auto-drafted from your paycheck. One of the biggest reasons adults struggle to save is because they haven’t made it a habit yet. You know how to pay bills on time. Tap into the power of that routine, and you’ll be a savings machine in no time! 
  • Be patient – your credit score won’t improve overnight. It may take months or even years for your credit score to bounce back after debt settlement. Don’t get discouraged along the way. Remain diligent about debt payoff and credit score building, and you will see positive changes over time. 

No matter what credit challenges you face, Low Cards is here to help you through them. Check out our Consumer Tips for additional money management guides, or use our credit card matching tool to find the perfect card for your needs. 

The information contained within this article was accurate as of August 6, 2020. For up-to-date information on any of the terms, cards or offers mentioned above, visit the issuer's website. Many of the offers on this article are from our affiliate partners, and LowCards.com may be compensated if you take action with any of our affiliate partners.

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heaven

About Heaven Speirs

Heaven Speirs is a contributing writer for LowCards.com. She remains up-to-date with the latest developments in the credit card industry and the financial sector as a whole. Heaven has over 10 years of experience in online journalism, the bulk of which has been focused on personal finance. Heaven attended Oklahoma State University, where she discovered her talent for research and content creation. In her spare time, Heaven enjoys painting, playing poker, and spending time with her husband and three dogs.