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Credit Card Debt Settlement: Is It a Good Idea?

Trying to pay off thousands of dollars of credit card debt is overwhelming. Luckily, there are several options for debt relief. However, not all of them are equally beneficial. In fact, some of them, like debt settlement, can be downright harmful and hurt your finances more than they help them! We will break down the ins and outs of credit card debt settlement and why we don’t think it’s a good idea:

credit card debt settlement

Credit Card Debt Settlement: What is it?

Before we explain why credit card debt settlement isn’t a good idea, let’s outline what it is exactly. When you settle on your debt, it means your creditors allow you to pay less than what you owe. They will typically only do this if your accounts are delinquent or in default. Debt settlement is administered by a debt settlement company, which is a for-profit company. When you agree to their program, you pay the debt settlement company one monthly payment, and they send it to your creditors. However, the don’t pay your creditors right away. They will stop paying on your accounts until they are delinquent. Only then will they negotiate the settlement with your creditors.

Why is credit card debt settlement bad for your finances?

The biggest problem with debt settlement is that it wrecks your credit score. Because you aren’t paying off the principal amount you owe, this shows future lenders that you can’t be trusted to pay back what you borrow. Payment history is the most important factor in determining your FICO score, so when you settle on your credit card debt, it doesn’t reflect well on your ability to pay back your debts.

Another issue with debt settlement is that the companies that administer these programs are for-profit, and they often charge high fees. This defeats the purpose of settling on your debt in the first place if all the money you saved through a debt settlement program ends up going right back to the debt settlement company. Additionally, the money you save when you settle can be counted as income by the IRS. For example, if you have $10,000 in credit card debt, but you only pay $6,000, that $4,000 you “saved” may be counted as taxable income.

Are there better options?

Yes! There are plenty of alternatives to debt settlement. Some consumers choose to take out a debt consolidation loan to pay off their debt. Others choose to call a nonprofit credit counseling agency and enroll in a debt management program. A debt management program can help you pay off all of your debt, but with lower fees and interest rates. This is because the credit counseling agencies negotiate with the creditors for you. However, you still pay off the principal amount, so your credit stays intact.

If you are struggling to pay off your debt, ACCC can help. Call 800-769-3571 today to speak to a certified credit counselor!

ABOUT AUTHOR / Madison

Madison is a Marketing Communications & Programs Associate at ACCC. She is excited to share her tips on saving money and being financially responsible here on the Talking Cents blog!

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