By 2018, the purchase volume for total consumer credit – debt in the United States was $3.7 trillion. In general, all these individuals have to pay off their debt to the credit card issuers. However, not everyone will be in a financial position to repay their credit card balance.
So, when the customer becomes delinquent on their payments, creditors may accept a part of the amount. It is less expensive for the credit card company to settle than forgo the entire amount. This process is known as the credit card debt settlement.
Understanding the Debt Settlement
Credit card settlement amounts may be between 50-80% of the balance. You may negotiate with your credit card provider to pay a lump-sum amount for the entire debt.
Agreeing to a low amount to satisfy the debt is beneficial to the creditor, too. The other option they have involves sending the account to collections and filing a lawsuit. It takes time to obtain a judgment and collect the debt.
Here is an example:
You haven’t paid for over a year, and the amount you owe is $8,000. You can pay up to $5,000 since all your money is tied up in other areas. They will report any delinquency to the credit bureaus, which negatively impacts your credit score.
You contact the company and offer to give $4,000 in a one-time payment. After some negotiations, they agree to settle for $5,000 and write off the remaining debt. They inform the credit bureaus that the debt is successfully settled for a lesser amount.
How Much Do You Pay the Debt Settlement Agency?
Once you hire a debt settlement company, they will advise you to stop making payments. Instead, you will add money to a dedicated bank account. You are the owner of the funds, and the interest accrued.
After you arrive at a favorable settlement, the account administrator transfers the funds to your creditors. They may collect an account maintenance fee. The debt settlement company charges a portion of the debt owed towards its service charges.
Some companies may charge a percentage of the amount you save and not the whole amount owed. Either way, you only pay the fee when the settlement is successful.
Can a Credit Card Debt Settlement Affect Your Credit Score?
Paying less than the owed amount to your creditor gets recorded as “debt settled” or “partial payment accepted.” If your credit score is high before the credit card settlement, it may impact it negatively. A consumer with a high FICO score may get affected more than someone with a low score. However, this is better than filing bankruptcy, which remains on your record for ten years.
What Information Should You Receive from the Debt Relief Company?
Here are the disclosure requirements you get from the agency about the debt relief program:
- Pricing structure
- Terms and conditions
- The amount you must save before making an offer
- Estimated time to see results
- Possible negative consequences of nonpayment. E.g., lawsuit, additional interest, etc.
Going for credit card debt settlement is a big decision. Look for a firm that provides fair and transparent services. They must disclose that you control the funds and can withdraw any time without penalty. The account administrator must be an independent entity that does not receive referral fees.