Credit card settlement process
What is a credit card settlement process?
When you're having difficulty keeping up with your credit card balances, the credit card settlement process can sound appealing. Advertisements from credit card debt settlement companies suggest that you can use the credit card settlement process to get out of debt for just pennies on each dollar owed. But like all things that sound too good to be true, there are many potential downsides to credit card settlement that you should be aware of before entering a credit card settlement process.
What is credit card settlement?
The credit card settlement process looks like this:
- You stop paying your monthly credit card bills.
- The money that you would have paid your creditors goes into a savings account, usually managed by a debt settlement agency.
- After several months, when your credit card account is significantly overdue, your settlement agency approaches your credit card company and proposes to settle your debt with a lump sum payment, using the money you saved.
- If your creditors accept the credit card lump sum settlement, your debt is erased.
- You may have to pay taxes on the money you saved, along with fees to the debt settlement agency.
Does the credit card settlement process work every time?
Sometimes the credit card settlement process is effective, and consumers can settle their debt for anywhere between 25% and 80% of the original amount they owed. But other times, credit card companies may refuse to settle and may take consumers to court instead.
Does the credit card settlement process affect your credit rating?
Because you must stop paying your bills in order to make debt settlement more attractive to your creditors, your credit rating will inevitably be severely damaged. In fact, it may take as long as seven years before you can apply for loans, credit cards, mortgages, and credit.
Consulting a professional about the credit card settlement process.
Before entering a credit card settlement process, it's a smart idea to get advice from a financial professional or a credit counselor about how to settle credit card debt most effectively. At American Consumer Credit Counseling (ACCC), we offer free credit counseling where you can discuss with a certified counselor your finances, look at all the options available to you, and choose the path out of debt that makes the most sense for you.
Debt management: an alternative to the credit card settlement process.
When consumers want to know how to settle with credit card companies without damaging their credit rating, we typically recommend a debt management program. Debt management involves setting a budget you can live with while you continue to pay down your debt over time. For a small fee, we'll take responsibility for paying all your bills on time – you just have to make one payment to an account with ACCC each month and we'll take care of the rest. We'll also work to seek reductions in interest rates, finance charges, and late fees to help you pay down your debt more quickly.
Contact ACCC for a free credit counseling session, or to learn more about our debt management program.