When someone you owe decides to forgive all or a portion of a debt you owe them, this is known as debt forgiveness. Credit card debt forgiveness sounds too good to be true, and while highly unlikely, there are cases when it happens. The most common scenario is credit card debt settlement. You should also take note that going down this path will have consequences.
Borrowing money with a credit card usually involves repayment. If you don't, your debt could eventually be in collections, leading to a damaged credit score. However, it’s not all doom and gloom since a credit card debt settlement can be the start on your path to financial recovery.
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When you have more debt than you can afford to pay and don’t foresee any way you can catch up, a credit card debt settlement is usually the best course of action. A debt settlement is like asking forgiveness for what you owe and negotiating to pay a portion of the original debt. You still have to make monthly payments, but it will be less than what you originally borrowed.
The best time to make a credit card settlement offer is when your account is already in collections. As soon as you start falling behind with your payments, you can already negotiate a settlement with the credit card company. The downside is that they'll likely exhaust all means to get you to pay as much as possible, close to the original amount.
A better option is negotiating a settlement when your creditor has decided to charge off the account. When they do this, they record the debt as a loss and are willing to sell it for a small percentage of the debt to a collector. If you offer a settlement at this point, you can get a smaller amount than the original.
The best time, though, is when the credit card company has already sold your debt to a collector. Collection companies pay a small amount for the original debt owed and then exhaust all means to pursue the debt collection. They may accept a significantly lower amount when you negotiate with them as long as they make a profit.
At this point, you may wonder, what percentage will credit card companies settle for? The answer is it depends. If you’re dealing with a credit card company (who is the original creditor), they can demand as high as 80% of the borrowed amount. If you’re dealing with a debt collector, they may settle for 50% of what you owe.
Negotiate for 40% - 50% of the original amount when making your offer. While it may seem incredibly low, this is the usual range expected from settlement offers and is considered a realistic goal. It also allows for negotiations as the creditor will push for a higher percentage.
You should consider your current financial situation and the realistic payment you can afford before making an offer. Set aside cash since you can use this as leverage to show how serious you are with the negotiations. Most creditors would demand a lump sum payment, but you can always negotiate for monthly payments with lowered interest.
Even if you feel relieved when your credit card settlement offer is accepted, you should keep in mind that it comes with strings attached. Credit card debt settlement has a major impact on your credit score and is recorded as a negative mark for as long as seven years.
A bad credit score will lead to rejected loans and credit card applications. You won’t get new credit, and if you do, you’ll be subjected to higher interest fees. This can affect various scenarios like taking out a mortgage or applying for a business loan.
However, a credit card debt settlement can’t push your score lower than it already is. Your credit score drops as soon as you start missing payments and the account enters collections. No amount of debt settlement can lower it.
It may seem impossible to come out when you’re deep in financial debt. Debt settlements offer relief to help you restart your financial journey. It gives you a second chance to rebuild your credit score, and encourage proper budgeting and spending in the long run.
Learn how to get out of credit card debt and be a wise credit card user by exploring our resources at Processing Card.
Florence Carpenter is passionate about ensuring that the process of opening merchant accounts is as straightforward as possible. She graduated from the University of Michigan with a bachelor’s degree in Marketing.
