Is a Debt Settlement for Credit Cards a Good Thing or Not?

Credit card debt burdens can weigh down a person's financial stability with excessive interest rates, enormous fees and the ever-present threat of having to file for bankruptcy. A large number of people find themselves buried under too much credit card debt at some point in their lives, but there are a number of things consumers can do to climb out of debt. Debt settlement is a popular option for dealing with credit card debt, but this technique may not be the best decision for your personal situation and financial goals.

Settlement Process

Debt settlements are essentially negotiations between creditors and account holders. During normal settlement negotiations, creditors or collections agents offer to close the account if the account holder pays an agreed-upon amount in full at the time of the agreement. The settlement amount is generally lower than the total amount outstanding. With interest and fees added in, however, settlement amounts can be larger than your original debt if the account has been in default for some time.

Another way to reach debt settlements is to consult with a professional debt consolidator. A debt consolidator will negotiate with your creditors and pay off your debt itself, creating a single, new account for you to repay.

Advantages

The advantages of debt settlements are widely understood. Account holders are released from their debt burden for less than they would have otherwise paid if they had settled on their own. People using debt consolidators gain the advantage of reducing their overall debt burden through lower interest rates and more favorable fee structures, while avoiding the threat of legal action for defaults.

Disadvantages

The disadvantages of debt settlements are less well known than the advantages. When creditors close an account after a settlement, they report the settlement to the major credit bureaus, which can have a detrimental effect on your credit score. Potential creditors in the future will think twice about granting you an account if they see you settled with other creditors for less than you owed.

Using a professional consolidator can be even worse for your credit reputation. Consolidators often use aggressive, persistent tactics to pay off your debt for pennies on the dollar. This can cause creditors to report an "aggressive settlement" on your credit report, which can cause future creditors to deny you an account.

Conclusion

Your personal situation determines whether debt settlements are a good thing or not. If your main goal is simply to get out from under your debt burden, settlements can be a very good thing. If your goal is to improve your credit score while reducing your debt, however, you may be better off seeking alternative means of getting out of debt, such as freezing accounts and creating custom repayment plans with creditors, or by obtaining a new loan and paying your credit accounts in full without negotiation.