Clearing & Settlement for Credit Cards

The Federal Trade Commission recommends debt settlement as an effective strategy for clearing credit card debt. Settling debt clears, or eliminates credit card debt and makes it possible to avoid the risk of bankruptcy. Settlement resolves delinquent credit card accounts for less than the full balance. Savings are often significant, with SmartMoney reporting savings of 20 to 70 percent off the original balance.

Disadvantages

Credit card companies will not consider accounts for settlement until they are considerably past due, and that presents a challenge for people who want to settle but don't want to ruin their credit as they do so. Unfortunately, debt settlement does hurt credit -- even before accounts are paid off for less than the full balance. Card companies have no incentive to settle while the accounts are paid as agreed, but generally will consider settlement when accounts are two or three months past due. Missing payments damages credit scores, and it is possible that someone with good credit could have very bad credit by the time multiple settlements are completed.

Credit Scores

Credit scores are three digit numbers ranging from 350 to 850, with scores of 720 or higher considered outstanding. All credit situations are different and it is impossible to predict how settlement would affect scores. However, someone with credit scores around 700 can expect to lose a significant number of points -- perhaps more than 100 -- through debt settlement. A credit score of 620 is widely considered as the minimum score needed for "good" credit, meaning a drop of 100 points could ruin credit for some people, at least over the short term.

Tough Decisions

Settlement is still a good option for many people despite the damage to credit scores. Many people struggling with excessive debt and trying to avoid bankruptcy already have poor credit because of missed payments. Someone whose score is already below 620 could decide that losing another 50 points or so through settlement isn't going to matter much in the long run. People in that position often decide that they are better off settling as many debts as possible and then starting over with a credit rehabilitation plan. It is possible to restore credit within two or three years after settlement by selectively opening new accounts -- perhaps secured credit cards -- and making timely payments while keeping balances low. Secured cards require deposits in savings accounts that serve as collateral.

Process

Settling credit card accounts is not difficult. Although credit card companies are not required to settle accounts most will. Negotiations are possible over the telephone or by mail. Telephone discussions are faster, although written correspondence offers a paper trail and is a good choice for people who want to settle but don't want to speak directly with a skilled negotiator. Card companies usually offer their biggest discounts on settlements just before the six-month mark when accounts typically are closed, charged off and sent to debt collection agencies.