When Is Credit Card Settlement a Good Idea?

Credit card debt settlement allows you to pay off your credit card debts by negotiating a lesser payment amount in satisfaction of the total debt. While credit card debt settlements may seem like an ideal solution, there are negatives that you need to be aware of before choosing this option. Determining if credit card debt settlement is a good idea for you requires that you take into consideration multiple factors and potential consequences.

Debt Settlement Basics

Debt settlement is simply a way in which you and your credit card company come to a new agreement about how you will pay back your debt. There are several possible ways to negotiate new terms, such as by offering to pay a portion of the debt as a lump sum payment. If you agree to this kind of settlement, the card company accepts your partial payment and forgives the remainder of the debt. Other options include forbearances that allow you to not have to make any payments for a period of time or renegotiating new interest rates or payment sizes.

Settlement Effects

When you settle your credit card debts, those settlements usually get included in your credit report. This will lower your credit score and make it harder for you to receive a loan or get good interest rates on new loans and can even cause the rates on your current loans to rise. Also, if you settle a debt for less than the total amount you owed, it may be considered income by the IRS, and you may have to pay taxes on it.

Choosing Settlement

Some debts are good candidates for settlement, while others are not. In general, any unsecured debts you have are usually good choices for settlement, while secured debts are not. Unsecured debts, such as medical or credit card bills, are those in which the creditor has not taken any collateral. In general, the older the debt, and the closer to the statute of limitations you are, the better terms you can usually get on a debt settlement.

Debt Settlement Companies

Consumers considering credit card debt settlement sometimes turn to a debt settlement or debt negotiation company. Be very careful if you choose this option. Debt settlement companies may promise you the world, but can end up costing you more money than if you had negotiated a settlement on your own. Meeting with a credit counselor that is recognized and approved by the U.S. Department of Justice is usually more preferable than hiring a debt settlement company you know nothing about.