Dear Credit Card Adviser,
I will very soon be receiving a lump sum payment from a workers’ comp suit and would like to know the best way to pay off my $33,000 of credit card debt. Two of the cards in particular I just want to part company with because of the low limit and high interest rate. As far as the other cards go, I could pay off the entire debt and start fresh; but I want to know if I can negotiate the balance down and then pay off that figure? Would they still keep me as a customer, or would I lose my credit line completely? I still need access to a credit line, but not nearly as much as what I have established. How might this affect my credit rating? Before my injury my rating was almost 800, now it is 150-plus points less. The goal is to keep as much of the settlement in my pocket while returning my credit rating. I have never been late or over any limits on any of the cards, but the last two years have made mostly the minimum due.
— Randal

Dear Randal,
You probably won’t be able to settle credit card debt that isn’t delinquent. Usually issuers will only settle when they are desperate for a payment. To get them to that point, you’d have to stop paying your credit cards, which of course will wreck your score, incur penalties and result in calls from collection agents. I do not recommend that route. There is no guarantee that a credit card company will accept a settlement.

As for the impact on your score, debt settlement is as severe a notation as an account included in bankruptcy. For more information, read the Bankrate feature, “How is debt settlement reported?

I suggest that you sit down with a certified credit counselor who will review your situation and develop a customized action plan. To find a legitimate agency, go through the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Credit counseling should be free or low cost and does not impact your credit score.

You may be eligible for a debt management plan in your case, which is basically a workout agreement with your creditors set up by the counselor. Under a DMP, you make one monthly payment to the agency, which then distributes the money to your creditors. A plan typically spans 36 to 60 months. The upside is your issuers may lower your interest rates. The downside is that credit cards in a DMP will probably be closed or suspended. As long as the creditors receive the payments on time, most will report that you are paying as agreed.

If you decide to pay the debt off on your own, I would focus first on paying down the balance with the highest interest rate while making minimum payments on your other accounts. Once that account is paid off, then target the balance with the second highest rate and so on, until all the debts are wiped out. Use our reduce credit card debt calculator to determine how long it will take to clear your balances under this plan. An alternative strategy involves paying down the lowest balance first and working your way up, so that debts are eliminated faster.

I would also recommend saving some of the money for unplanned expenses. Our emergency fund calculator will tell you how long it will take to your reach your savings goal.

Good luck!

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