Simply asking for a settlement on your credit card does not hurt your credit. It's the process of qualifying for a settlement that's the real killer. SmartMoney.com reports that credit card companies will often settle credit card accounts for 20 percent to 70 percent of the balance. But there's a catch: Card companies will usually settle accounts only if they are more than three months behind, meaning your credit score will begin to drop long before you're eligible for a settlement.
Considerations
Credit card companies report to the major credit bureaus each month about the status of your accounts. Each time you miss a payment, your credit score can fall. With some credit card companies, it could take six months of missed payments before the card company makes a settlement offer you can afford, leading to significant damage to your credit score.
Reasoning
Card companies will not settle accounts that are current because the companies have no reason to do so. You could have a $10,000 balance on a credit card account that is current. For whatever reason, you may decide you want to quickly eliminate debt, so you call the card company and ask to settle for $5,000. However, there is no incentive for the card company to agree at that point, and the bank likely will deny the request.
Process
Card companies agree to settlement offers when they fear account holders are about to default on the accounts and walk away. MSN Money reports that after six missed payments, card companies usually close accounts and lists them as charged off. Usually the companies are willing to discuss settlement until the day they list it as a charge off. After that the bank usually assigns the account to a debt collector, who may also discuss settlement. Also, some banks assign charged-off accounts to an internal collections team which may also offer a settlement.
Impact
Settlement also hurts credit when you complete the transaction. The card company or debt collector will notify the credit bureau that you settled the account for "less than the full balance," or will provide similar language for your credit report. Experian, one of the major credit reporting bureaus, says settlement information on your credit report can result in an additional drop in your credit score.
Warning
Handle your own debt settlement without employing for-profit debt settlement firms. The Federal Trade Commission reports that some of the firms are shady and offer poor service. Also, debt settlement can lead to a greater tax burden because the Internal Revenue Service may treat savings through settlement as income. See your tax adviser before settling.
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