Do Credit Card Companies Ever Lower Your Amount of Debt?

Only in debt settlement do credit card companies lower your level of debt. However, to qualify for debt settlement, you must already be in dire financial circumstances. By understanding all your debt relief options, you may be able to get out of debt while saving yourself from rejection for new credit in the future.

Debt Settlement

When a credit card company agrees to lower the amount of the balance you need to pay off, it's called debt settlement. Generally, if a creditor agrees to settle a debt, the payoff amount is somewhere between 20 and 75 percent of your total balance, according to Smart Money writer Aleksandra Todorova. The settlement is a one-time payment; generally, creditors do not accept payment plans for settlements.

Qualifying

The only reason creditors accept settlements is when the alternative is bankruptcy. Therefore, you must be headed toward bankruptcy, with missed payments, to qualify for settlement. Creditors are generally willing to accept a partial payment only if they believe the only other likely outcome is that they will receive no payment. If you are current on payments but having difficulty making minimum payments, you may benefit from working with a credit counselor to learn about your other options.

Effects

Debt settlement may damage your credit score and make it difficult to obtain new credit in the future. If you have many delinquencies and negative marks on your report, the impact of debt settlement may not be as severe as it is on someone with an otherwise healthy credit report. Debt settlement can also appear on your credit score as partial payment accepted, debt settled for less than amount due or settlement. In the future, lenders may see that you weren't able to pay the full amount of your debt and see you as a high credit risk.

Considerations

Whether or not you decide to file for debt settlement, working with a reputable credit counseling organization will help you to formulate a realistic budget and identify problems in your spending so that you can prevent yourself from being burdened by financial problems in the future. A credit counselor will also show you options for debt relief, which may include debt consolidation or a debt management plan. The National Foundation for Credit Counseling provides location-specific information on reputable credit counseling organizations.