A Guide to Settling Credit Card Debt: Strategies and Tips
13 MIN READ
Published July 06, 2023 | Updated December 10, 2023
The best bet for consumers with financial challenges is to hire a professional debt settlement company to negotiate a settlement. Learn about the options for settling your credit card debt and the steps to negotiate successfully.
If high interest rates are making it difficult for you to pay off your debt or if your credit card payments each month are challenging to keep up with, settling credit card debt may be the right option for you.
The average credit card debt is $6,469 in the U.S. in 2023, with Generation X holding the largest balances at $8,266. Most Americans are likely to use a substantial portion of their earnings each month to pay down debt. But when credit card debt becomes a financial burden, one option is to negotiate with your credit card issuer. If you have more than $10,000 in credit card debt, you may be able to come up with a workable solution with your credit card company to settle as much as 50% of your total debt enrolled before fees.
Understanding Credit Card Debt Settlement
Credit card debt settlement is the process of settling your outstanding debt for less than the total amount you owe by offering a lump-sum payment to the lender. Debt settlement can allow you to save as much as 20%-50% of your total debt enrolled, depending on your situation. The lender will then decide whether to accept your settlement offer.
You can try to negotiate your credit card debt on your own or work with a debt settlement company to do it for you. If you hire a professional, you’ll be required to pay a fee that is usually calculated as a percentage of the enrolled debt. Fees can range from 15% to 25%.
How to Negotiate Credit Card Debt Settlement Yourself
Credit card users have two options when it comes to settling credit card debt. They can negotiate debt themselves or hire a debt settlement company. Here’s how to negotiate credit card debt settlement yourself.
Know How Much You Owe
The first step is to take stock of your credit card debt. Go through your statements and make a list of how much you currently owe. If you have multiple credit cards, make an itemized list with interest rates for each card. Note down the credit card company’s phone numbers. You’ll need all this information in one place before you start making calls.
Explore All Your Options
Learn more about the options your credit card issuer offers to consumers facing financial hardship. There are several types of agreements you may be able to negotiate with your credit card company, such as a lump sum settlement, a hardship payment plan, or a workout agreement.
A lump sum settlement refers to settling your debt for less than you owe. If you have multiple late payments, have been unable to make minimum monthly payments, or have not been paying your credit card bills at all, your credit card issuer may be more likely to accept the settlement offer.
Understand the Risks
The type of settlement you choose will depend largely on your financial situation. In many instances, negotiations can come with downsides, so it is important to be aware of those. A lump sum settlement may affect your credit scores depending on how debt is reported to the credit bureaus. If your credit card company reports debt as a charge-off or as settled, your credit scores are likely to be impacted. If the debt is reported as account closed or paid as agreed, there may not be a negative impact on your credit score.
There may also be tax implications because the IRS considers forgiven debt as taxable income. If you can demonstrate that you are insolvent and that your total liabilities are more than your total assets, you may not have to pay taxes on the discharged debt.
Negotiating With Your Credit Card Company
After weighing all your options, if you have decided to negotiate, you’ll need to call and ask to speak with the collections department. Explain your financial situation clearly and ask to settle your account. You may have to call multiple times and be persistent. Note down the names of the people you speak with during each call and document your conversations.
Get the Terms in Writing
If the credit card company is willing to negotiate with you, ensure you get it in writing. Any agreements made verbally will not be enough since your account may be sent to collections, or the person you are negotiating with may leave the company. Get it on paper to protect yourself.
Settling Credit Card Debt for Less Than You Owe
It is important to note that if you are trying to get out of credit card debt, debt settlement is a suitable option when you are facing serious financial hardship, have maxed out all of your credit cards, or have defaulted already. You have to be 180 days behind on your payments for credit card companies to consider your settlement offer.
Settling credit card debt for less than you owe requires you to approach your lender with an offer for a partial payment, which can be anywhere from 20% to 50% of the amount you owe. Ask for credit card debt forgiveness for the remaining amount. The lender can accept, counter, or reject the offer. Once you agree on a lump sum settlement amount, you’ll need to submit that payment within a specific timeframe.
Settling Old Credit Card Debt
When you have old credit card debt on which you haven’t made payments, you accumulate interest and late fees. This adds to your amount of debt and makes it harder for you to pay off if you don’t settle. Once you become delinquent, you can also expect to receive collection calls. In many cases, creditors may sue consumers, which may result in wage garnishment.
The longer your credit card debt goes unpaid, the higher the risk of getting sued. It is best to save as much money as possible to offer a lump sum payment for settling old credit card debt sooner. You can also sign up for a debt settlement program, where you’ll be able to make convenient monthly payments to save for a settlement.
Will Settling Credit Card Debt Affect Your Credit Score?
Settling your credit card debt may impact your credit score. Once you settle your account, it will stay on your credit report for seven years from the original delinquency date. Although settling your credit card account has a negative impact on your credit history, not paying at all will hurt you more. If you have large sums of outstanding debt and you are unable to pay it in full, settling it is usually more beneficial than leaving it outstanding.
Settling Business Credit Card Debt
If you are going out of business or are unable to pay your business credit card debt for another reason, you will have to notify your credit card issuer about it. It’s often best to clearly explain your situation and tell them you are prepared to offer a fair settlement. If you have unsecured debts, it is recommended that you use an individualized approach and meet with them or speak with them one-on-one.
Offer a settlement in writing and clearly write what you can pay as a credit card settlement and that you need them to agree to release the debt when you make the repayment. In some cases, creditors may be uncooperative or may ask for substantially more. In such cases, it is best to involve a debt settlement company for debt negotiation. Consulting a debt settlement attorney may also be a good idea.
Pros and Cons of Settling Debt with Credit Card Companies
There is more than one way of paying off credit card debt. If you are considering settling debt with your credit card company, it’s important to be aware of the pros and cons of doing so.
- The biggest benefit of debt settlement is being able to settle your credit card debt for less than the full amount you owe.
- Compared to debt consolidation, debt management, and credit counseling, debt settlement is typically faster. Usually, you’ll be able to pay off your debts in 24 months to 48 months.
- For many people, settling credit card debt provides them with a reprieve from collection calls and the stress that comes with it.
- Debt settlement allows you to avoid Chapter 11 and Chapter 7 bankruptcy for overwhelming debt.
- The fees charged by debt settlement companies vary. You may end up working with a company with very high fees that may wipe out the savings from your debt settlement if you don’t compare your options.
- Your credit scores will be lowered through a settlement.
- You will have to pay taxes on the forgiven debt.
When to Consider Settling Credit Card Debt
Every situation is different, so it is important to evaluate your own financial situation and make an informed decision about whether settling credit card debt is right for you. Consider debt settlement if:
- You are at risk of bankruptcy as a last resort.
- You have already defaulted on your credit cards or have several missed payments.
- You have no resources to pay off your entire balance in full.
- If you are at risk of getting sued by your creditors.
- You have more than 10k in unsecured debt.
Legal Consequences of Settling Credit Card Debt
If you have already defaulted on your credit cards and are not making minimum payments towards them, you’ll receive phone calls from creditors. If your creditors are not kept in the loop on the settlement agreement, they may continue to contact you. When you start withholding payments on debt, your creditors may file a lawsuit that may lead to wage garnishments.
Resources for Settling Credit Card Debt
If you are considering settling your credit card debt, it is best to familiarize yourself with your rights as a consumer. Read more about the Fair Debt Collection Practices Act (FDCPA) and consumer protection laws by the Federal Trade Commission (FTC). Debt collectors cannot use false, deceptive, or misleading means to collect your debts. Knowing your rights will help you deal with collection agencies better.
Before you work with a debt settlement company, contact your local consumer protection agency to see if there have been any complaints filed against the company in the past.
Personal Stories of Successful Credit Card Debt Settlement with TurboDebt
Everyone’s struggle with credit card debt is unique. When it comes to managing finances and paying off debt, you need a personalized approach. That said, credit card debt settlement has helped thousands of people in the U.S. pay off debt and save money in the process. Consider these two personal stories of successful settlements for clients of TurboDebt.
Story 1- Danel
Danel is a retired NASA engineer who had $9,459 in total debt and was finding it challenging to keep up with monthly payments and not make a big dent in his debt. He got in touch with TurboDebt with the hope of becoming debt-free. He enrolled in the program for ten months with monthly payments of $228. Danel was able to graduate from the program with total savings of $2,503, which was 27% of his total debt.
Story 2 - Deidra
Deidra is a fitness trainer with a total debt of $23,645. She is currently an active client. When she enrolled in a debt settlement program by TurboDebt, a weight was lifted off her shoulders. The debt professionals walked her through the entire process. She is currently making monthly payments of $213 towards her debt and has been able to save $11,399, which is 48% of her debt so far. Within a year, she was able to open a credit card and start rebuilding her credit. She feels free, and her life is back on track.
4 Tips for Managing Credit Card Debt
Even after settling your credit card debt, you’ll need to stay vigilant to avoid getting back into the debt trap. You’ll need a plan to curb your spending to stay out of debt in the future. Consider getting in touch with a credit counselor to get credit counseling or work with a personal finance expert.
1. Create a Budget
Create a budget each month and stick to it. This will allow you to see exactly how much you are earning and how much you are spending. There are many types of budgeting methods to choose from, such as the zer0-based budget, 50/30/20 budget, and the envelope budgeting system.
If you find it challenging to stay away from credit card use, the envelope system may work well for you because it is cash-based. Pay for all your expenses with cash to visualize how much money you have on hand for each of your expense categories.
2. Curb your Spending
Once you have a clear idea of how much you are spending in each category, it will be easier for you to cut unnecessary expenses. Consider limiting your spending on discretionary expenses such as entertainment, dining out, streaming services, and shopping.
3. Pay Extra Towards Your Debt
Any money you save by cutting your expenses can be used to make extra payments toward your credit card debt. Use tax refunds, bonuses, and any windfalls to pay off your debts faster. As you lower your outstanding credit card balances, you’ll be paying less towards interest charges.
4. Build an Emergency Fund
After settling your credit card debt, focus on building an emergency fund. Put aside money every month in your bank account to cover unexpected expenses such as medical bills, home repairs, car repairs, and more. Aim to save at least three months’ worth of expenses so you don’t have to rely on using credit cards for emergencies. With an emergency fund, you’ll be able to pay upfront for these expenses.
Debt Settlement Companies or Agencies
While it is possible to negotiate with credit card companies yourself, you may want to consider working with a debt settlement company to make the process stress-free. Consider these pros and cons of working with a debt relief company before you make your decision.
- Debt settlement companies know which lenders are more likely to settle and for how much.
- They are skilled at negotiations, so they’re likely to get you a fair settlement.
- Debt settlement programs will provide you with the motivation and discipline needed to save towards a lump sum settlement amount which you can leverage during negotiations.
- They can help you become debt free faster. Their settlement programs are typically 24-48 months.
- Debt settlement companies typically charge a percentage of the total debt enrolled as a fee. Some companies may have very high fees that may negate your savings from the settlement.
- Not all settlement companies may have your best interest at heart.
Conclusion: Settling Credit Card Debt
Debt settlement involves making a one-time payment to cover a part of your total debt in return for the lender forgiving the rest. You also have the option to make a monthly payment into your settlement account, which is typically less than what you might be currently paying on your credit cards. Once the full amount is saved, it gets paid to your creditors. If your account is in default, this can be a viable option for paying off your debt and getting a start fresh in life.
If you are looking for a debt relief option that fits your needs, choose a top-rated company like TurboDebt. Contact us today for a free consultation, and we’ll determine the best debt relief program for you.