Settling Credit Card Debt

Posted by Tracy Kerscher | July 29th, 2009 | Help & Tips

Are you Struggling to Pay Down Your Credit Card Debt?

Make the First Move: Reach out and Call

If you are having difficulty paying your credit card debt, there are some options that can save you some money and end the dreaded phone calls from creditors and collection agencies.

Once you realize you will not be able to make your monthly payments, you should immediately contact your creditor. This shows good faith on your part and the creditor, in turn, will be more willing to work with you. It is always better to work out an agreement with your creditors before you miss a payment in order to prevent them from reporting negative information to the credit bureaus.

When you call your creditor, calmly explain your financial hardship. You can ask the creditor to lower your monthly payment or your interest rate. You can also request that any fees be waived. Ask for a payment plan and let your creditor know what you can afford to pay per month.

If the customer representative you are speaking with is unwilling or unable to help you, then ask to speak with someone who has the authority to help you. You may have to make several phone calls. Be persistent but polite!

Once you’ve made an arrangement, be sure to get the agreement in writing. Also, keep track of the names of the persons you spoke with and the time of the conversation for your records.

Debt Consolidation

Another alternative is debt consolidation. You can take out a home equity loan to pay off your credit card debt. The interest rate on a home equity loan tends to be lower than other loans. Another advantage to home equity loans is that the interest paid on these loans is tax deductible.

A personal loan is another option, but getting one depends on your credit rating. If you have a good credit score, then you are more likely to get a loan. Look into borrowing from credit unions since they tend to offer loans at lower interest rates than banks. Be sure the interest rate offered is lower than the rate you are currently paying on your credit cards.

Beware of debt consolidators who claim they will negotiate lower interest payments and entice you with lower monthly payments. Usually, these consolidators take a fee from your monthly payment and send the rest of your payment to your creditors. You can save yourself money if you deal with your creditors directly.

What is debt settlement?

If you cannot afford to repay your debt in full and want to avoid bankruptcy, then you may want to consider debt settlement. A “debt settlement” or “debt negotiation” is an agreement you make with your creditor in which you agree to pay a portion your debt. The creditor then forgives the remainder of the debt. For example, if you owe $5,000 on your credit card, you can agree to only pay $2,000.

If more than $600 of a debt is forgiven, then it is considered taxable income. So, in this example, you would have to pay tax on $3,000 to the IRS.

Most creditors will not settle your credit card debt if you are current on your payments. Usually creditors will only settle for partial payment if they believe that there is a risk they will not get any payment at all. In order to qualify for a debt settlement, your account must be delinquent for at least 90 days.

Debt Settlement & Credit Score

A debt settlement is a negative entry that remains on your credit report for seven years. It adversely affects your credit score and will make it difficult for you to obtain unsecured credit in the future.

How a debt settlement will affect your credit score depends on your credit history. If your credit score is low or you have a history of late payments, then a settlement will not have a big impact. However, if your credit score is high and you are current with your payments, then a debt settlement will decrease your score considerably.

Debt Settlement Firms

There are debt settlement companies that will directly negotiate with creditors on your behalf for a fee. These companies act as facilitators to help you repay your debt for less than you owe.

Beware of fraudulent companies that charge excessive sign-up and monthly processing fees. Some of these companies have been shut down by the Federal Trade Commission (FTC) for illegal practices and making false claims.

Before you sign up with a debt settlement company, be sure that it is accredited by The Association of Settlement Companies (TASC), has certified arbitrators, and charges reasonable fees. Be sure the company is registered with the Better Business Bureau and that it is licensed or bonded in your state.

Debt Settlement: The Pros & Cons

Pros:

• You can save money by paying off a debt for less than you owe
• Your credit report will no longer show open delinquent accounts
• Once the debt has been settled, no legal action can be taken against you to collect the debt

Cons:

• Debt settlement will appear as “settled” debt rather than “paid in full.” This will decrease your credit score
• The negative entry will stay on your credit report for seven years
• The part of the debt that is forgiven can be considered as taxable income by the IRS

Credit Counseling

You may want to seek credit counseling from a reputable non-profit organization. These organizations have counselors who are certified and trained in helping people with financial problems. They can help you create a budget, negotiate with your creditors, and help you come up with a plan to deal with your financial problems.

See full list of financial services available at CardOffers.com

Tags: Credit Card Debt, Credit Counseling, credit history, Credit Score, Debt Consolidation, debt settlement, Debt Settlement Firms
Filed under: Help & Tips |

One Response to “Settling Credit Card Debt”

1. Wilhemina Singletary Says:
   May 24th, 2011 at 7:19 pm

   I would like to convey my passion for your kind-heartedness for folks who must have assistance with your topic. Your special dedication to passing the solution up and down appeared to be pretty invaluable and has consistently permitted women much like me to arrive at their targets. Your interesting guidelines can mean much to me and additionally to my office workers. Regards; from each one of us.

Leave a Reply