How to settle credit card debt
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Credit cards are often necessary to bridge the gap between paychecks or account for unexpected expenses, but cardholders may only make minimum payments and never manage to get ahead.
Credit card debt settlement is one option to help get your finances back on track, as lenders are often willing to negotiate and help find ways to solve your current credit crisis. But what exactly is debt settlement, and what are your options? How do you start the process—and is it the best fit for your finances?
Here’s what you need to know about how to settle credit card debt.
What is a credit card debt settlement?
Credit card debt settlement is the process of negotiating with your lender to accept a lump sum settlement for your credit card debt.
Let’s say you’ve maxed out your current credit card at $15,000 and aren’t getting anywhere with monthly payments. While you’ve made most payments on time, you’ve also missed a few months and your debt isn’t going anywhere but up.
While your credit card provider could keep taking small interest payments, the longer the debt remains active, the greater the risk you’ll default entirely, leaving the debt unpaid. As a result, lenders are often willing to negotiate for a smaller, lump sum amount that clears the debt entirely.
In the example above, if you can show that current financial hardships make it impossible to pay back the entire $15,000 debt, your credit card company may be willing to take $9,000 or $10,000 as a one-time lump sum payment to ensure it gets something rather than nothing.
When it comes to settling your credit card debt, you’ve got two choices: do it yourself (DIY) or use a reputable third-party. Let’s dig into both options in more detail.
DIY debt settlement
Your first option is to negotiate with your credit card company directly. Not sure how to negotiate credit card debt settlement yourself? Start by getting your paperwork in order–this includes proof of your current debt along with information about your income and expenses. Then, contact your credit provider’s customer service line and ask about the possibility of debt settlement. While the process is similar across card providers, the specifics will differ based on your current lender.
- How to settle credit card debt with Capital One: Call the Capital One personal credit card service line at 1-800-227-4825 to start the settlement process.
- How to settle credit card debt with Citibank: Talk to the Citibank Payment Assistance Team at 1-800-370-6730 for help with your current credit card debt.
- How to settle credit card debt with Synchrony Bank: Find your credit card partner from the Synchrony Bank contact webpage, then log in to your account and select the “Chat Now ” options.
The percentage credit card companies will settle depends on your current debt amount, financial situation and the benefit or loss assessment for lenders.
Debt settlement programs
You can also choose to utilize a third-party provider to help start the settlement process. As noted by the FTC, however, it’s worth doing your research—contact both your state’s Office of the Attorney General and your local consumer protection agency to find a reputable, reliable debt settlement company.
Here’s why: In most cases, these debt settlement services are for-profit, meaning they charge a fee for their services, which can put even greater strain on your finances.
Most of these companies use a long-term savings approach to pay down your debt, which means asking you to put a specific amount of money into an escrow account each month—often for 24 or even 36 months—which can feel like an eternity when you’re already struggling with debt.
In addition, debt settlement services often advise consumers to stop paying their credit card bill entirely, which theoretically demonstrates to creditors that you can’t afford to pay your balance. The problem? Once accounts are delinquent for long enough, many lenders will sell your debt to collection agencies—meaning you’re no longer dealing with your original lender directly and may start getting collection calls or have debt collectors coming to your home.
While the Fair Debt Collection Practices Act (FDCPA) does put limits on collection practices—such as forbidding harassment and specifying the hours during which they can contact you—these collection companies are not obligated to negotiate any offers for settlement, meaning that you may not be able to reach a favorable agreement even if you’ve spent months paying a debt settlement company.
This isn’t to say that these companies can’t offer benefits for managing and reducing your debt—it just means you need to be very careful when selecting a service.
How to settle credit card debt
No matter which method you choose to settle your credit card debt, your first steps are the same:
- Confirm the amount you owe. Start with a phone call to your credit provider and confirm the amount you owe, then ask for this information in writing. This helps if there’s a dispute about the total amount as you move through the process.
- Consider your options. Look at all your options, including debt settlement, workout agreements or even0 percent interest credit cards that offer balance transfers.
- Collect your paperwork. If debt settlement is your preferred option, collect all relevant paperwork. This includes your current debt balance, proof of income and information about ongoing expenses to demonstrate you won’t be able to pay down your debt in full.
- Make contact. Reach out to your credit provider. Some companies have specific debt-help lines, while others require you to use their general customer service line or start the process via online chat.
- Get everything in writing. If you come to an agreement, get it in writing. Review the terms thoroughly so you understand what’s happening with your account. For example, some credit companies may allow you to keep using your card with a lower limit after you settle your debt. Some may increase your interest rate, while others may make closing your account a condition of the settlement.
Pros and cons of credit card debt settlement
While debt settlement can help eliminate large credit card debt, the process comes with pros and cons.
- Reduces the amount owed: If your provider is willing to negotiate, you can significantly reduce the total amount you owe. Provided you can pay this amount upfront and in full, debt settlement can help stabilize your finances.
- Eliminates current credit obligations: Debt settlement completely eliminates your current debt once you pay the lump sum balance.
- Helps you avoid bankruptcy: If your debt is substantial, personal bankruptcy may be your only other option. Settlement helps avoid this process by removing your credit balance owing.
- Offers peace of mind: Without your credit debt piling up, you can focus on other financial goals and start saving for the future.
- Debt settlement will affect your credit score: Lenders will typically report your settlement to all three major credit bureaus and note that although the debt was cleared, it was not paid in full, in turn reducing your credit score.
- Could lead to the sale of your credit debt: If you don’t pay your balance month after month in an attempt to increase the likelihood of a settlement, your credit card company may sell your debt to a collection firm.
- Settlement is not guaranteed: Even if you can demonstrate economic hardship, lenders aren’t obligated to offer settlements. This is especially problematic if you’re paying a debt settlement company for help.
- Credit settlement companies may cost you more: Over time, the fees associated with credit settlement companies can pile up, eventually costing you more than the debt itself.
Alternatives to credit card debt settlement
Balance transfer cards
If settlement isn’t your first choice, consider a balance transfer credit card. These cards often come with an intro 0 percent APR for 12 or 18 months, which allows you to work on paying down the principal balance of your card rather than the interest-only portion. The caveat? You typically need a solid credit score to successfully apply for 0 percent balance transfer cards, so it’s best to get started on this process ASAP rather than waiting for debt to pile up.
Create a debt payment plan
If your credit cards aren’t maxed out and you still have some financial flexibility, consider creating a debt payment plan.
Start with a basic budget. Collect data on how much you’re paying for debt, living expenses and other products and services each month, and see where you can cut back. If there’s room in your budget, focus on the smallest debt you have and pay it down as quickly as possible, then move to the next smallest, etc.—this snowball method both offers visible progress and jump-starts the process of getting you back in the black.
Consider a consumer credit protection program
While the federal government doesn’t get involved with debt settlement directly, getting government help with credit card debt is possible thanks to evolving protection programs. First up? Nonprofit credit counseling services. These agencies can help you identify budget strategies and create plans that help you tackle your debt as quickly and safely as possible.
New legislation such as the Coronavirus Aid, Relief and Economic Security Act (CARES Act) can also help—if you meet the requirements for CARES assistance programs, your creditors are required to report your account in good standing to credit bureaus, even if you’re not currently making payments, in turn giving you time to get back on track. It’s worth noting, however, that CARES Act protection does not apply to accounts that were delinquent prior to the start of the pandemic.
The bottom line
Settling credit card debt can help reduce the total amount you pay and get your finances back on track. Not sure how to negotiate debt settlement on your own, get started with a settlement company or decide if this is the right option for you? Know your rights, understand the risks and find the solution that offers the best debt reduction in the shortest amount of time.