Life can be tough when you cross the grace period on your credit card bills on a monthly basis and the compounding interest rates increase your outstanding balance. Obviously, you can choose to ignore your credit card bills for several months but creditors won’t let you live in peace. They will report your financial activity to the credit bureaus. Soon, your FICO score drops significantly and your financial life becomes difficult.
If you still don’t repay the credit card bills, then your creditor can charge off your account and pull down your credit score by 100 points. Your creditors can also assign or sell your accounts to debt collection agencies and leave you at their mercy. The debt collectors can file a lawsuit against you to garnish your wage.
What can you do to get rid of your credit card debt problem?
The best way to handle this situation is to settle your credit cards as soon as possible. Credit card settlement helps you to pay less than what you owe and save a significant amount on your outstanding balance. Credit card settlement also helps you to avoid a lawsuit and wage garnishment in the future.
How does the credit card settlement process work?
The credit card debt settlement process works in the following ways:
- Once you enroll with a credit card debt settlement company, they will ask you to save a significant amount in a trust account usually managed by them. They will also ask you to stop making monthly payments to your creditors for the time being.Don’t worry about the consequences of not making the monthly payments. Because, when you’re thinking about settling your credit cards, chances are high that you’re already past due on your bills. This will not impact your credit score much.
- After you have saved a significant amount, the credit card debt settlement company will approach your creditor or debt collector to resolve the debt issues with a credit card lump sum settlement using the money you have saved.
- If the credit card company accepts the credit card lump sum settlement, then you can give a sigh of relief. The settlement company pays the agreed-upon amount on the stipulated date and you’re debt-free.
What are the ways to settle credit card debt?
There are 2 ways to settle your credit card and these are:
- Settling credit card debt on your own
- Settling through credit card debt settlement companies
Let’s discuss the 2 ways of settling credit card debts so that we can compare and decide which one is the best way to pay back creditors.
a. Settling credit card debt on your own
You can settle your credit card debt on your own. But for settling credit card debt on your own, you have to convince your creditors or debt collectors. You should negotiate with your creditors on your own to reduce the total debt amount.
You need to explain why you couldn’t pay your bills in the last few months so that the creditors or debt collectors agree to the credit card settlement.
For instance, you can tell them that you’re in financial hardship due to unemployment or a reduction in income or divorce, or excessive debts. You are unable to repay the debt in full and want to go for a credit card debt settlement.
Thus, you’re requesting them to reduce the outstanding balance by a certain percentage.
If you’re delinquent on your bills and creditors understand that you’re really in financial hardship, then they may agree to reduce your outstanding balance so that you can repay your debts.
Once the creditor agrees for settling credit card debt, you should sign a credit card debt settlement agreement with the creditor and then make the payment to avoid unnecessary problems in the future.
b. Settling credit card debt through settlement companies
If you want to enroll with a credit card debt settlement company, then they will negotiate with the creditors on your behalf for credit card settlement.
However, you need to save a significant amount in a trust account opened by the credit card debt settlement company after joining the credit card debt settlement program. The settlement company will negotiate with your creditors and bring down your overall balance in exchange for a small fee.
| Settling credit card debt on your own | Settling credit card debt through a settlement company | |
|---|---|---|
| Negotiation | You need to negotiate with your creditors on your own | The credit card debt settlement company will negotiate with creditors on your behalf |
| Fee | You don’t have to pay a credit card settlement fee | You have to pay a credit card settlement fee |
| Savings | You might not be able to grab a good deal if you have poor communication skills | Credit card debt settlement companies may help you save more since debt negotiators have good negotiating skills |
The comparison is there right in front of you. Hopefully, it will be easier for you to decide which one is the best way to settle credit card debt.
Advantages of settling credit card debt through a credit card debt settlement company
Some benefits of settling credit card debts are as follows:
You can get rid of the overwhelming debt burden
If you are unable to repay what you owe, then a debt settlement can be the best way to get rid of the debt. Once you or a credit card debt settlement company have negotiated for lower debt payment and you have paid the settlement, you are debt-free at a lower rate than any other debt repayment method.
You can be a debt-free person in less time
If you enroll in a good credit card debt settlement program, you can be debt-free for 2-4 years, which is less time than you would spend paying back by considering other debt repayment options. Because, in a credit card debt settlement, you are required to pay a reduced amount of your total debt. Thus, you can bring back financial peace easily in your life.
You can avoid bankruptcy
By considering credit card debt settlement, you can avoid bankruptcy. Most of the people who are in credit card debt don’t want to file for bankruptcy because it will follow them for the rest of their life. Yes, bankruptcy entry will remain for 10 years on the debtor’s credit report. And, dealing with the consequences (poor credit score) of filing bankruptcy can be difficult for a debtor.
But, if you consider a credit card settlement, you can get out of the debt easily and the record will stay on your credit report for 7 years. You can also negotiate with your creditor or debt collectors to remove the listing from your credit report by offering a certain amount. Thus, you don’t have to deal with a poor credit score for a long time. You can boost your credit score by adding positive things to your credit report. So, bankruptcy should be the last resort when you have a chance to consider a debt settlement.
How a credit card debt settlement helps save money
If you consider the credit card debt settlement process to become debt-free, then you can save your hard-earned money.
How?
Credit card debt settlement is a process that allows resolving debts for less than the full outstanding balance. However, to get approval for settling credit card debt, you have to convince your creditors or debt collectors.
If you successfully negotiate with your creditors or debt collectors for the credit card settlement, then you can save money on your total debt that you owe.
If you are not able to negotiate with your creditors, you can enroll in a credit card debt settlement process for a credit card lump sum settlement.
Remember, depending on the debt amount, through a credit card settlement process, you can save from 10% to 50% of what you owe.
Is there any credit card settlement tax consequences?
Yes, you need to pay the IRS after settling your credit card debts. As you are saving money by not paying the credit card debt in full, you are liable to pay the tax on the total amount that you saved in the credit card debt settlement.
If you save more than $600 through the credit card debt settlement, then you have to pay tax to the IRS because they would consider it as your savings.
For instance, if you have borrowed $2000 from someone and paid $1100, then $900 is your savings. You have to pay tax on this $900.