Credit card debt is daunting and expensive, so it’s no wonder more Americans are looking at ways to negotiate the settlement of their credit card debt. According to the Federal Reserve Bank of New York’s Q1 2024 Household Debt and Credit Report, credit card balances fell by $14 billion to $1.12 trillion, but history shows that these numbers are likely to rise again as the year progresses.
Clearing your credit card debt requires you to negotiate with the credit card company, either on your own or with the help of a lawyer, debt counselor, or debt clearing company. Before you begin the credit card clearing negotiation process, you need to be well prepared and follow some post-clearance steps to get the most out of the process.
What is Credit Card Debt Consolidation?
Credit card debt consolidation, also known as debt relief or debt adjustment, is the process by which a lender allows you to make payments on your credit card for less than the outstanding balance.
Creditors may agree to this if their customers are facing financial difficulties, especially if there is a risk that the debt will not be repaid.
The Pros and Cons of Negotiating Credit Card Debt
While settling a credit card seems like an option for getting out of debt, there’s a caveat: If your credit report shows that the account was settled rather than closed, it will further lower your credit score.
But this method may help those who are facing financial difficulties or are unable to make payments, and it can also prevent continued interest and late fees from adding up to even more debt.
Strong Points
- Eliminate current credit obligations: If your settlement negotiations are successful, your creditors will no longer demand any further payments. This will also stop collection calls and further legal action from your lender.
- Faster Credit Score RecoveryWhile card payments do hurt your credit in the short term, it’s preferable to late payments, defaults, and judgments.
- Helps you avoid bankruptcyDebt consolidation and bankruptcy will remain on your credit score for several years, but some people may want to avoid bankruptcy.
- Total debt will decreaseWhen you settle your credit card debt, you offer your lender a settlement amount that is lower than your total debt balance, meaning you end up paying less than what’s specified in your credit agreement.
Cons
- expensive: Some debt relief companies not only charge high fees for their assistance, but also require you to pay a large amount up front to clear your debt.
- Negative impact on credit score: The lender will notify the credit bureaus that the account has been settled but not closed. This will hurt your credit. However, this may be negligible in the long run, since your credit is likely already poor if you need to settle a debt.
- There is no guarantee of settlement: Lenders are not required to agree to a settlement as they are entitled to receive the amount set out in the contract. Some lenders may only agree to a partial settlement.
- Potential increase in debt: If you don’t make payments in the hopes of paying off your debt, you may incur late fees and interest in the meantime. These fees can cause your debt to grow.
- Possible risks: Not all debt counselors or debt relief companies are legitimate. If they ask for a large amount of money up front or contact you unsolicitedly, they are likely a scam.
- Tax impact: Once you liquidate your account, the forgiven amount will be considered taxable income.
How to pay off credit card debt
You have several options for settling your credit card debt: you can settle it yourself, hire a reputable third-party debt settlement company, file for bankruptcy, consider a credit card hardship program, or apply for a debt management plan.
DIY Credit Card Payment
Your first option is to negotiate directly with your credit card company. Contact your card issuer’s customer service line and inquire about the possibility of debt consolidation. The process is similar between issuers, but the details vary from lender to lender. Here are some examples from different lenders:
Capital One: To start the settlement process, call the Capital One personal credit card service line at 1-800-227-4825.
Citi: For help with current credit card debt, call Citi’s customer service line at 1-800-347-4934.
Synchrony Bank: Find your credit card partner on Synchrony Bank’s contact webpage and log into your account. You’ll be redirected to the card partner’s website where you can chat with a customer service agent.
The percentage that a credit card company will accept in a settlement will depend on your outstanding card balance, your financial situation, and the lender’s assessment of how favorable a settlement is for you financially. Generally, the less likely a lender believes you are to repay your debt, the more likely they are to accept a settlement.
Third Party Debt Consolidation
If you are considering seeking the assistance of a third-party provider to settle your debt, proceed with caution.
These services can help you get the settlement process started, but do your homework to avoid being scammed: Contact your state’s attorney general’s office and local consumer protection agencies to identify reputable, trustworthy debt settlement companies.
Many debt consolidation services are for-profit and charge a fee for their services, and this added cost can put a strain on already tight finances.
Additionally, these companies often take a long-term savings approach, requiring you to deposit a certain amount into an escrow account each month for periods ranging from 24 to 36 months, which is a long time if you’re struggling with debt. These payments are then used to settle the debt in a lump sum.
If you are settling your debts yourself or with a company, be aware that if your debt is sold to a debt collection agency, you may not have time to negotiate a settlement with your original creditors.
Debt Management Plan
A debt management plan involves reviewing your income and expenses with a debt counselor and creating a financial plan for paying off your debts. This only applies to credit cards and other unsecured debts.
Debt counselling agencies can negotiate lower interest rates and fees, but not lower settlement amounts. While you are going through a debt management plan, you may find it difficult to apply for further credit, as well as the effects of debt consolidation or bankruptcy.
bankruptcy
There are two types of bankruptcy to consider, and both options will remain on your credit report for at least seven years.
- Chapter 7This type of bankruptcy, also known as liquidation bankruptcy or ordinary bankruptcy, involves selling your assets, using the proceeds to pay your creditors, and having any remaining debts wiped out or discharged.
- Chapter 13This type of bankruptcy follows a strict three to five year settlement payment agreement structured by a bankruptcy attorney. In this type of bankruptcy, you can keep your assets.
Not all debts are cleared during bankruptcy, such as child support and taxes.
Credit card assistance program for those in financial difficulty
Many lenders offer credit card hardship programs to their customers, which may include a temporary interest rate reduction and protection from collections for the duration of the program.
To qualify, cardholders must demonstrate financial hardship and agree to the lender’s terms, a process that typically takes six to 12 months.
Another way to manage credit card debt
If you want to streamline your payments and get a decent credit score, consider debt consolidation or balance transfer.
- Balance Transfer Credit Cards: If you’re struggling with high credit interest rates, a balance transfer credit card with a 0 percent interest rate could simplify your cash flow for a period of time. Be sure you can pay off your debt before the interest-free period ends.
- Debt consolidation loan: Debt consolidation involves combining several smaller debts into one larger loan, which can result in lower payments and a lower interest rate. However, the term of the loan may be extended, meaning you may pay more interest in the long run, but your payments will be lower and you’ll have more room in your budget.
How to prepare to pay off credit card debt
Before you begin negotiating with your creditors, evaluate your current financial situation. Determine the total amount of your outstanding debts, assess your ability to pay, and set realistic goals for debt consolidation discussions.
Additionally, make sure you understand your rights under the Fair Debt Collection Practices Act (FDCPA) to protect yourself from unfair practices during the negotiation process.
Once you have enough information, you can follow these steps to negotiate your credit card debt with your creditors:
- Gather all relevant documentation, including current debt balances, credit card statements, payment history, and correspondence with creditors.
- Determine the maximum amount you are willing to pay as a lump sum and prepare to negotiate from there. Provide proof of income and details of ongoing expenses to show that you will not be able to repay the debt in full as agreed.
- Contact the creditor or debt collection agency and let them know you want to settle the debt. Remain calm, polite, and persistent during negotiations.
- Once an agreement has been reached, make sure all terms are clearly documented before making any payment.
- Make any agreed payments promptly and keep documentation of settlement for your records.
How to rebuild your credit after settlement
Clearing your credit card debt can provide immediate relief, but it can also have a negative impact on your credit report and lower your credit score. To rebuild your credit, there are several strategies you can try.
- Pay your bills on time: Create a budget to ensure you have enough money to pay all your bills. Make sure you pay your bills on time to demonstrate responsible financial behavior.
- Use your credit wisely: Improve your credit utilization ratio (the percentage of your total available credit limit that you are currently using) by limiting new credit applications and keeping credit card balances low.
- Monitor your credit report: Regularly check your credit report and take steps to correct any errors promptly. A credit repair company may be able to help you with this.
- Consider a secured credit cardSecured credit cards are easier to get, even if you have poor credit, because they require you to put down cash as collateral. By using them responsibly, you can qualify for a standard credit card.
Once you understand your options, you can decide if clearing your credit card debt is the right step for you financially. You can also speak to a financial advisor or registered debt counselor who can walk you through the process.
