How to settle credit card debt

Credit card debt settlement happens when a lender agrees to settle a borrower’s debt for less than the full amount. It can sometimes be an option when a borrower falls behind with their credit card payments. 

But is debt settlement a good option to manage credit card debt? Here are some things to consider.

What you'll learn:

• In a credit card debt settlement, cardholders pay a portion of the debt they owe and their credit card issuer forgives the rest.

• Credit card debt settlement may involve fees and have a negative effect on credit scores. 

• Cardholders might be able to negotiate a credit card debt settlement themselves or with the help of a third party. 

• Other ways to manage debt include balance transfers and debt consolidation loans.

With a credit card debt settlement, a card issuer forgives a portion of a borrower’s debt and the borrower repays what’s left on an agreed schedule. It could be a lump sum payment or a series of payments. 

The idea of debt settlement is often closely connected with the debt settlement programs that third-party companies offer. But it’s also possible to pursue debt settlement independently or with the help of an attorney. 

If you’re having trouble with credit card debt, it might be worth connecting with your credit card issuer to learn what options are available.

If you’re considering debt settlement as a way to manage or reduce debt, here are some things to think about first: 

• Your credit card issuer may work with you to avoid debt settlement. The Consumer Financial Protection Bureau (CFPB) advises considering all your options before committing to debt settlement. This includes reaching out to your credit card issuer. According to the bureau, “Some creditors might be willing to...waive certain fees, reduce your interest rate, or change your monthly due date to match up better to when you get paid, to help you pay back your debt.” 

• Debt settlements may be reported to the credit bureaus. It’s not possible to say exactly how a settlement will affect your credit. But the settlement and payment information likely will be reported to the major credit bureaus TransUnion®, Experian® and Equifax® as “settled in full for less than the full balance.” Settled accounts can stay on your credit reports for seven years.

• You may not get the result you want. Lenders aren’t legally required to negotiate with borrowers over how much they owe. And even if your lender will negotiate over how much you owe, you may not get as much of your debt forgiven as you’d like. 

• There may be tax consequences to a debt settlement. If some or all of your debt is forgiven, it may be treated as taxable income by the government. That means you could owe income taxes on that amount. 

• Settling debt may result in account closure and loss of access to the credit card. If your account hasn’t already charged off, it could be permanently closed once you accept a settlement offer. If that’s the case, you won’t be able to reopen the account or use the card again.

Debt settlement is one of several credit card debt relief options. Here are some others:

Credit counseling organizations offer advice and assistance to people who need help managing money. And if you’re struggling to make payments on debts, they may be able to organize a debt management plan for you. Unlike a debt settlement plan, which lowers payments by lowering the amount owed, a debt management plan focuses on providing a longer time period to pay at lower rates without fees. 

According to the CFPB, “Under a debt management plan, you make a single payment to the credit counseling organization each month or pay period and the credit counseling organization makes monthly payments to each of your creditors.”

You can get a list of government-approved credit counselors by calling the National Foundation for Credit Counseling at 800-388-2227 or visiting this list of counseling services from the U.S. Department of Justice.

With a credit card balance transfer, you transfer credit card debt from one or more accounts to a new card to consolidate debt and simplify payments. Some credit cards offer introductory or promotional interest rates for balance transfers. Be sure you know when the promotional rate will expire and the standard rate will apply.

Debt consolidation loans let you consolidate your debt into a single loan. They usually come with fixed repayment terms to specify how much you’ll owe each month with a clear timeline for debt repayment. A longer loan term might mean a smaller monthly payment but more interest. A shorter loan term might mean less interest but larger monthly payments. There may be fees involved, and teaser rates may only be temporary.

Bankruptcy is a legal process that can help individuals remove or reorganize existing debts that they may not be able to repay. The Federal Trade Commission says it’s “generally considered the option of last resort.”

Filing for bankruptcy could come at a cost to personal finances and credit. Because bankruptcy laws differ from district to district, it can also be complicated.

Credit card settlement can help you manage debt by reducing the amount you owe. But there can be drawbacks. And other options might be worth considering first. It might help to ask your credit card issuer what options are available to you. You can also speak with a qualified financial expert before making any major decisions.

If you decide a credit card settlement isn’t right for you, there are other options. If you’re considering a balance transfer, you can learn more about Capital One’s balance transfer credit cards.