What Is a Credit Card Buyout?

A credit card buyout can be one of various that help credit card holders by alleviating their credit card debt. Such buyout options can be useful when recurring credit card bills have become too much for the card holder to handle. However, a card holder should proceed with caution.

Debt Settlement

When a credit card holder has an excessive amount of debt on his card, he may be able to work out a deal with the credit card company to pay off the balance at a discount. Although most credit card companies do cut such deals with card holders, they only tend to do so only when they are convinced that the card holder is truly having trouble repaying the debt. If you are in this situation, though, you may be able to get the credit card company to forgive a substantial portion of your debt under an agreement that you make a single large payment. Credit card companies tend to be more willing to settle debts with card holders in this way if the card holder is contemplating a bankruptcy filing, in which case the credit card company might not be able to collect on the debt at all.

Credit Card Loans

Realizing that many credit card holders sometimes have trouble making payments on their cards only because the interest rate and minimum recurring payments are so high, a number of lenders offer loans to credit card holders as a way of refinancing their debt. Often coming as part of a general consolidation loan that factors in most or all of their debts, a credit card loan may give the card holder the ability to make lower payments on the debt and/or repay the debt at a lower interest rate. When a lender issues a credit card loan, it pays off the remaining credit card debt, thus resulting in a "buyout."

Credit Score

In order to get to the point at which a credit card company would be willing to settle your debt by agreeing to a single discounted payment of the remaining balance, you must be in a dire financial situation in which such debt settlement is necessary. For instance, if you have a history of missing payments, your credit card company may be more willing to settle with you. However, getting to this point will effectively ruin your credit score. On the other hand, getting a credit card buyout loan from a third party will have no recognizable negative effect on your credit score as long as you make timely payments on that loan.

Taxation

While debt settlement may be advantageous in that it allows you to eliminate your debt by repaying only a fraction of the original amount, it can have additional drawbacks in addition to any credit score effects. The main drawback deals with taxation. When the credit card company agrees to eliminate your debt at a discount, the IRS may count the difference between what you owed and what you paid as taxable income. You can avert this by proving to the IRS that you were financially insolvent on the date of the debt settlement. The IRS does not view money received from credit card loans as taxable income.