A person who is deeply in debt to credit card companies has to make some tough decisions about how to regain his financial equilibrium. Often times, a person will tighten his belt and attempt to pay off his debt, often while sacrificing other things in his life. However, other debtors may attempt to settle their debts with the credit card companies. While the first strategy may be more painful in the short term, it may save the person money in the long run by preserving their credit rating.
Repaying Credit Cards
If a person can repay credit cards, this is probably the best thing for him to do. Repaying credit cards will allow the person to get out of debt, while helping salvage his credit rating. A person who pays back his debts in full is not just more likely to retain a good credit rating, but may also be allowed to continue to take out a line of credit with the finance company that issued him the cards.
Debt Settlement
Debt settlement may appear a smart decision in the short term, but it has long-term consequences. A person who cannot or does not want to pay off a credit card debt may attempt to open negotiations with his company about paying back only part of the debt. While some credit card companies will only accept full payment, others will be willing to accept partial payment, particularly if the person is experiencing financial hardship.
Credit Impact
The largest downside to a debt settlement is that, if the company reports the settlement to a credit reporting agency, it can result in a lower credit score for the debtor. This is because credit reporting companies frown on the practice of paying back a debt for only a portion of the amount that the debtor originally agreed to pay. A lower credit score may increase a person's interest rates on loans, making it a poor long-term financial decision.
Considerations
When choosing between paying off credit card debt and settling, a person should consider his current and future financial situation. If paying off the credit card debt will lead him to default on other loans, he may want to choose debt settlement. In addition, some creditors will be willing to report a debt settlement as a payment in full if the debtor requests it. If a person is considered debt settlement, he should include this demand in his negotiations.
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