If you’re carrying very high credit card balances, you may have noticed advertisements for credit card settlement agencies that offer to help you settle credit card debt for a small portion of what you owe. But what is credit card settlement, exactly, and can it help you get out of debt quickly and easily? Here’s a short introduction to “What is credit card settlement?” that provides a brief overview of this debt relief strategy.
What is credit card settlement?
Credit card debt settlement is a strategy for eliminating your debt by offering to make a single, lump sum payment to credit card companies. To make this credit card lump sum settlement more attractive to your creditors, you’ll need to stop making your monthly payments for a period of time – often six months or more. During that time, you’ll make payments to a savings account with a debt settlement agency instead. When your overdue balances become quite high and the credit card companies are worried you might not be able to make good on your debt, the agency will contact your creditors with your settlement offer. Your creditors may be likely to accept your offer if they feel they have little chance of getting additional payments from you.
What is credit card settlement’s greatest advantage?
The biggest benefit of negotiating credit card settlement is being able to become debt-free without having to pay your debt in full. Most successful settlements require consumers to pay 25% to 80% of their original debt.
What is credit card settlement’s biggest drawback?
Because credit card settlement involves not paying your debt in full and not paying your monthly bills for quite some time, your credit rating will be severely damaged.
What is credit card settlement’s impact on credit scores?
It may take as long as seven years to rebuild your credit, during which time you’ll likely have difficulty getting credit cards, applying for loans, renting an apartment in your name, or qualifying for a mortgage.
What is credit card settlement’s cost in fees?
If your debt collection settlement offer is accepted, you’ll owe a significant fee to the settlement agency – often as much as 25% of your savings.
What is credit card settlement’s impact on taxes?
You’ll likely have to pay taxes on any amount that was forgiven by your creditors. Depending on your tax bracket, that could be as much as another 25% to 30% of your savings.
What is credit card settlement vs. credit card debt management?
Debt management is an alternate debt relief strategy for paying down credit card debt. Under a debt management plan, you’ll continue making regular payments on your credit card balances, so your credit rating won’t be adversely impacted. You’ll also get help and support from a credit counseling agency that will enable you to pay down your debt more quickly and help you to learn to live debt-free in the future.
To learn more about debt management and debt settlement, schedule a free credit counseling session with American Consumer Credit Counseling, a nonprofit agency devoted to helping people like you find the best path out of debt.