What is a credit card settlement?

What you should know about credit card settlements.

Sometimes you hit a bump—or many bumps—in life’s road and may fall behind in your credit card payments. If that’s the case and you’re having trouble keeping up with your bills, you may have options for resolving your debt.

One option may be a credit card settlement, which is when your credit card company forgives a portion of the amount you owe in exchange for you repaying the remaining amount. The remaining amount can be repaid in a single payment or over a series of payments.

There are trade-offs to a credit card settlement, however. So, before deciding if a settlement is right for you, know that you can always reach out to your credit card company to see if they have other options available to you, such as a custom payment plan, for example. According to the Consumer Financial Protection Bureau (CFPB—until their proposed name change of BCFP goes into effect, we continue to refer to them as CFPB), some credit card companies may be able to work with you.

What is it and how does it work?

As stated above, a credit card settlement is when a credit card company forgives a portion of the amount you owe in exchange for you repaying the remaining amount. The remaining amount can be repaid in one single payment or as a series of payments, as determined through the specific agreement.

How it works:

  • You—or an approved 3rd party on your behalf—work with your credit card company to agree on the terms of your settlement, primarily the settlement amount you will pay and when payment is due.
  • While you may pay the credit card company less than the full amount owed, the amount of the reduction can vary.
  • Some credit card companies may be willing to let you make a series of smaller payments over time while others expect you to pay the full settlement amount all at once. Keep this, and how much you can afford, in mind when you’re talking to your credit card company.

Keep in mind:

  • If your account has not already charged-off before you accept your settlement offer, then it will be permanently closed once you do accept the offer. This means that you will not be able to reopen the account and you cannot regain use of the card.
  • The settlement may be reported to the credit bureaus. While it isn’t possible to say exactly how a settlement will affect your credit report, your settlement and payment information may be reported to the major credit bureaus. This can stay on your report after you’ve paid the settlement in full.
  • If you decide to work with a qualified 3rd party to help with your settlement, the CFPB has a list of risks you should consider and the Federal Trade Commission (FTC) warns of common debt settlement scams of which you should be aware.
  • Depending on the amount of principal forgiven (the principal is the amount you actually spent with your card before any fees or interest), it may be treated as taxable income by the government—which means you could owe income taxes on that amount. If this is the case, your credit card company may provide you with a 1099-C tax form. Please consult your tax advisor and the instructions accompanying any tax forms for more information.

You should fully understand how credit card settlements work and what a settlement could mean for your credit and financial future before taking any action.

Alternatives to settlement

Working with your credit card company or a 3rd party on a settlement is just one option for managing your credit card debt. Take some time to research other credit card debt relief options before making any commitments.

Moving forward

If you think a credit card settlement could be the right choice, you can learn more in our post on how to settle your credit card debt.

Whichever path you choose, it’s important to understand  your credit report. Your report will help you know where you stand with lenders and plan for rebuilding your credit if needed. See our article on how to check your credit report to learn more.

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