How to settle credit card debt

Many individuals face the daunting challenge of managing credit card debt. The Federal Reserve Bank of New York reports that card debt hit a record high of $1.13 trillion in the fourth quarter of 2023. If you’re one of the many Americans overwhelmed by credit card debt, you may be seeking a way to settle your accounts and move forward.

Certain strategies can help you settle your credit card debts. By using the right negotiation tactics and taking preparation and post-settlement steps, you may be able to regain financial stability.

What is a credit card debt settlement?

Debt settlement involves negotiating with your creditors to pay off a portion of what you owe. Typically, this is a lump-sum payment in exchange for forgiveness of the remaining balance.

Also known as debt relief or debt adjustment, debt settlement can save you money by allowing you to resolve your debts for less than the full amount owed. This approach can provide relief for individuals struggling to keep up with high-interest payments or facing financial hardship. It can also prevent you from going deeper into debt by continually accruing interest or penalties for defaulting.

Pros and cons of negotiating credit card debt

Negotiating credit card debt can offer several advantages:

• Eliminating current credit obligations.
• Enabling you to achieve financial freedom sooner.
• Helping you avoid bankruptcy.
• Reducing the overall amount owed.
• Stopping collection calls and potential legal action.

You can weigh these benefits against potential drawbacks:

• Negative impacts on credit scores.
• No guarantee of a settlement.
• Tax implications for forgiven debt.
• The possibility of encountering scam artists posing as debt relief companies.
• The process can cost you more than you save.

How to settle credit card debt

You have two choices when settling your credit card debt. You can do it yourself, perhaps with the help of an attorney specializing in debt settlements, or you can enlist the services of a reputable third-party debt settlement firm.

DIY credit card settlement

Your first option is to negotiate with your credit card company directly. Contact your card issuer’s customer service line and ask about the possibility of debt settlement. While the process is similar across issuers, the specifics will differ based on the lender. Here are some examples from different lenders:

• Capital One: Call the Capital One personal credit card service line at 1-800-227-4825 to start the settlement process.
• Citi: Call Citi’s customer service line at 1-800-347-4934 for help with your current credit card debt.
• Synchrony Bank: Find your credit card partner from the Synchrony Bank contact webpage, then log in to your account. You’ll be redirected to the card partner’s website to chat with a customer service agent.

The percentage credit card companies will accept in a settlement depends on your outstanding card balance, your financial situation and the lender’s assessment of how financially beneficial the settlement might be. In general, the less likely they think you are to pay off your debt, the less they might accept in a settlement.

Third-party debt settlement

If you’re considering seeking help from a third-party provider to tackle your debt, tread carefully.

While these services can help start the settlement process, the Federal Trade Commission (FTC) recommends you do your homework. Begin by reaching out to your state attorney general’s office and local consumer protection agency to identify reputable and reliable debt settlement companies.

Many debt settlement services operate on a for-profit basis, meaning they charge a fee for their assistance. This additional cost can further strain your already tight finances. Additionally, these companies often employ a long-term savings approach, requiring you to deposit a fixed amount into an escrow account monthly, sometimes spanning 24 to 36 months — a long time when you’re grappling with debt.

These services may advise you to cease payments on your credit card bills altogether. However, once your accounts fall into delinquency, creditors may sell your debt to collection agencies. Collection agencies may be unwilling to negotiate a settlement, even after months of payments to a debt settlement company. Having accounts in collections can damage your credit score. You want to be sure this is a good strategy before pursuing it with a debt settlement company.

So, while there are benefits to third-party settlements, it’s important to be vigilant and conduct thorough research.

How to prepare to settle credit card debt

Before initiating negotiations with creditors, assess your current financial situation. Determine your total outstanding debt, evaluate your ability to make payments and establish realistic goals for debt settlement discussions. Additionally, familiarize yourself with your rights under the Fair Debt Collection Practices Act (FDCPA) to protect yourself from unfair practices during the negotiation process.

Once you have done this research, you can follow these steps to negotiate your credit card debt with your creditors:

1. Collect all relevant documents, including your current debt balance, credit card statements, payment history and any correspondence with creditors.
2. Determine the maximum amount you can afford to offer as a lump sum payment, and prepare to negotiate from there. Provide proof of income and details of your ongoing expenses to illustrate that you won’t be able to pay your debt in full.
3. Contact your creditors or collection agencies to express your willingness to settle the debt. Remain calm, polite and persistent during negotiations.
4. Once you reach an agreement, ensure all terms are clearly outlined in writing before making any payments.
5. Make the agreed-upon payment promptly, and retain documentation of the settlement for your records.

How to rebuild your credit

While settling credit card debt can provide immediate relief, it may also have a temporary negative impact on your credit score. Let’s look at a few ways you can rebuild your credit:

• Pay bills on time: Put together a budget so that you have enough set aside to pay all your bills. Ensure timely payments to demonstrate responsible financial behavior.
• Use credit wisely: Limit new credit applications, and maintain low credit card balances to improve your credit utilization ratio — the proportion of your total available credit card limits you’re currently using.
• Monitor your credit report: Regularly review your credit report for inaccuracies, and take steps to correct any errors promptly. A credit repair company may be able to help with this step.
• Consider secured credit cards: Secured credit cards are easier to qualify for with poor credit as they require a cash deposit as collateral. Using them responsibly can help you work toward qualifying for standard credit cards.

Alternatives to credit card settlement

When dealing with credit card debt, negotiating may not be the best choice for everyone. There are several different options available to help you get out of credit card debt, depending on your situation.

Balance transfer card

An increasingly popular alternative to debt settlement is opting for a balance transfer credit card. These cards frequently feature 0 percent introductory annual percentage rate (APR) offers that last for 12 or 18 months. The attraction of these offers lies in their extended interest-free period, allowing you to focus on reducing the principal balance of your card rather than merely chipping away while paying interest.

Securing approval for zero-interest balance transfer cards typically requires a solid credit score. Therefore, it’s wise to kickstart the application process sooner rather than later instead of waiting for your debt to pile up.

Minimum monthly payments

Your minimum monthly payment is the smallest amount you need to pay to keep your account in good standing. While this can prevent delinquency and protect your credit score, relying solely on minimum payments may take years and accumulate significant interest. It’s a temporary solution while you find a more effective way to settle your debt.

Credit counseling

Nonprofit credit counseling services can help you develop a personalized debt management plan and provide guidance on budgeting and financial management. They employ licensed credit counselors who can teach you proven best practices to get back on track.

Bankruptcy

Bankruptcy is a legal process that provides individuals or businesses with financial relief by allowing them to discharge or restructure their debts under the supervision of a bankruptcy court. As a last resort, filing for bankruptcy may provide relief from overwhelming debt, but it can have a significant long-term impact on your creditworthiness.

The bottom line

Navigating credit card debt can be challenging, but it’s not insurmountable. By understanding the debt settlement process, preparing effectively and exploring alternatives, you can take control of your financial future. Remember, seeking assistance from financial professionals or credit counselors is always an option if you need additional support. Stay proactive, informed and focused on your journey toward financial freedom.