How to settle credit card debt

Credit card debt settlement happens when a lender agrees to settle a borrower’s debt for less than the full amount. It can sometimes be an option when a borrower falls behind with their credit card payments.

But is debt settlement a good way to manage credit card debt? Here are some things to consider.

What you’ll learn:

• In a credit card debt settlement, cardholders pay a portion of the debt they owe, and their credit card issuer forgives the rest.

• Credit card debt settlement may involve fees and have a negative effect on credit scores. 

• Cardholders might be able to negotiate themselves or through a third-party debt settlement company. 

• Two ways to manage debt include balance transfer credit cards and debt consolidation loans.

With a credit card debt settlement, a card issuer forgives a portion of a borrower’s debt and the borrower repays what’s left on an agreed schedule. It could be a lump-sum payment or a series of payments.

The idea of debt settlement is often connected with the debt settlement programs that third-party companies offer. But it’s also possible to pursue debt settlement independently or with the help of an attorney.

If you’re having trouble with credit card debt, it might be worth contacting your credit card issuer. According to the Consumer Financial Protection Bureau (CFPB), “Some creditors might be willing to...waive certain fees, reduce your interest rate, or change your monthly due date to match up better to when you get paid, to help you pay back your debt.”

If you’re considering debt settlement, here are some things you might want to think about:

Credit card debt settlement can have some positive effects.

• It can help you control your debt: Credit card debt settlement can help relieve any immediate obligations and reduce what you owe. 

• It can stop things getting worse: Credit bureau Experian® says avoiding bankruptcy is preferable because of its “severe, long-lasting negative effects on your credit.”

Negotiating a settlement can come with many negatives.

• It may affect your credit. Experian says that settlement and payment information likely will be reported to it as “settled” or “paid in full for less than the full balance.” Settled accounts can stay on your credit reports for seven years.

• You may not get the result you want. Lenders aren’t legally required to negotiate with borrowers over how much they owe. And even if your lender will negotiate, you may not get as much of your debt forgiven as you’d like. 

• There may be tax consequences to a debt settlement. If some or all of your debt is forgiven, it may be treated as taxable income by the government. That means you could owe income taxes on that amount. 

• Settling debt may result in account closure and loss of access to the credit card. If your account hasn’t already charged off, it could be permanently closed once you accept a settlement offer. And if that’s the case, you won’t be able to reopen the account or use the card again.

The CFPB advises considering all your credit card debt relief options before committing to debt settlement. These may be an alternative to setting your credit card debt.

Credit counseling organizations offer advice and assistance and may be able to organize a debt management plan. Unlike a debt settlement plan, which lowers payments by lowering the amount owed, a debt management plan focuses on providing a longer time period to pay at lower interest rates without fees.

According to the CFPB, “Under a debt management plan, you make a single payment to the credit counseling organization each month or pay period and the credit counseling organization makes monthly payments to each of your creditors.”

You can get a list of government-approved credit counseling agencies by calling the National Foundation for Credit Counseling (NFCC) at 800-388-2227 or visiting this list of counseling services from the U.S. Department of Justice (DOJ).

The CFPB notes that “a reputable credit counseling organization should be willing to send you free information about its services.” The agency says counseling services that don’t might be worth avoiding.

With a credit card balance transfer, you transfer credit card debt from one or more accounts to a new card issuer to consolidate debt and simplify payments. Some credit cards offer introductory or promotional interest rates for balance transfers. Be sure you know when the promotional rate will expire and the standard rate will apply.

Debt consolidation loans let you consolidate your debt into a single loan. They usually come with fixed repayment terms to specify how much you’ll owe each month with a clear timeline for debt repayment. A longer loan term might mean a smaller monthly payment but more interest. A shorter loan term might mean less interest but larger monthly payments. There may be fees involved, and teaser rates may only be temporary.

Bankruptcy is a legal process that can help individuals remove or reorganize existing debts that they may not be able to repay. It’s generally considered a last-resort option.

Filing for bankruptcy could impact credit and personal finances. Because bankruptcy laws differ from district to district, it can also be complicated.

Credit card settlement can help you manage debt by reducing the amount you owe. But there can be drawbacks. It might help to ask your credit card issuer what options are available to you. You can also speak with a qualified financial expert before making any major decisions.

If you decide a credit card settlement isn’t right for you, there are alternatives. If you’re considering a balance transfer, you can learn more about Capital One’s balance transfer credit cards.