How To Settle a Credit Card Debt – Pros and Cons

Credit cards work quite well when it comes to satisfying one’s immediate financial needs. If used wisely, we can enjoy the maximum benefits out of a credit card. A credit card enhances your purchasing power by allowing you to buy such things that otherwise you could not have thought of buying. But you have to keep in mind that you always have to pay back for all such purchases in time so that so you do not attract unnecessary charges to your account.

But sometimes, we overuse our credit cards to such an extent that we are not able to repay the amount that we owe to the credit card companies. Late payment and interest charges keep on accumulating on the outstanding amount and the total payable amount keeps on increasing. In such situations when the borrowers are unable to pay their credit card debts, they get in touch with the credit card issuers and request for the credit card debt settlement. Credit card debt settlement might seem similar to paying off your credit card dues but both the terms are different from each other.

Settling down a credit card debt is not considered as an appropriate way of repaying what all you owe to the credit card company and may have its own pros and cons. But before discussing the pros and cons, let us first understand what credit card debt settlement is.

Credit Card Debt Settlement: Meaning

Credit card debt settlement is an agreement between the customer and the credit card company that requires the consumer to pay a lump sum payment (which is less as compared to the total amount outstanding) with respect to the total dues or even allows them to pay the outstanding amount in EMI at reduced interest rates. The credit card issuing company thereby forgives a certain part of the outstanding balances and also adjusts the fees and financing charges. This process is generally undertaken when the outstanding amount gets really high and the customer is unable to pay the amount that he owes to the credit card company.

This amount keeps on increasing because late payment fee and interest charges are continuously accrued this amount because of non-payment. Credit card settlements are done in extreme cases only and are not promoted by the credit card issuers as this settlement badly ruins your credit score. Credit card settlement is the last option that should be considered by the customer for repaying the debt. Even if there are very few chances of you paying the credit card debt by any other means, like availing a personal loan, taking help from some relative, etc, you should consider these options first before opting for credit card debt settlement.

Where on one hand a credit card debt settlement helps a cardholder get out of the debt trap, on the other hand, it also has some drawbacks as well. Every process has its own positives and negatives and so does the credit card debt settlement. Let us now discuss the pros and cons of credit card debt settlement.

Pros of Credit Card Debt Settlement

1. Current credit obligations are eliminated

You pay the whole amount due in a lump sum form by opting for a credit card debt settlement. Since after settlement, all the amount is paid at once, you will be free from all the current credit obligations.

2. Helps you in avoiding bankruptcy

Bankruptcy is a situation where an individual voluntarily declares himself as an insolvent (i.e., unable to pay his own debts). When you are unable to pay your debts, declaring yourself bankrupt is the only option left with you to save yourself from the lenders. But by choosing the credit card debt settlement option, you can save yourself from bankruptcy.

3. Offers peace of mind

You will always be under stress and will be harassed by the credit card companies for not paying the credit card bills. Therefore, you can enjoy your mental peace when you have settled the credit card debt and you can then start to save for the future.

4. Reduction in the amount you actually owe

What happens in the credit card debt settlement process is when you place a request with the credit card companies for the debt settlement, they negotiate with you on the amount that you actually owe. It depends on your negotiating power as well as how much can you bring down the outstanding amount due to the credit card company. In this way, the amount you owe to the credit card company gets reduced and hence your overall burden also gets reduced. And if you the settlement amount in full, this can help you in stabilizing your finances.

Cons of Credit Card Debt Settlement

1. Credit card debt can be sold to collection firms-

Suppose you have placed the settlement request with the bank and the response of the bank is still pending on your request, so you stop paying the credit card bill while you await the bank’s decision. In this case, if your monthly payments are being skipped repeatedly, your debt will be sold to the credit collection firms, which gets even worse because these firms torture an individual alot by placing regular phone calls, frequent home visits, etc.

2. Will badly affect your credit score

Once your settlement request gets approved and you have paid for the settlement amount, this will be reported to the credit card bureaus by the lenders. And hence, now your credit card report will have the word ‘Settled’ instead of ‘Closed’ which is actually a strong word and will affect all your future loan applications and put them at risk. When a loan is termed as settled, it is considered as a negative credit behavior and your credit score will drop by approximately 75-100 points.

The credit card issuing company will write off the difference between the actual amount due and the actual amount paid as a loss and will report the same to the credit bureau. The word ‘settled’ will be indicated in your credit report for almost up to 7 years. When you will apply for any loan after the settlement, you will be considered as a low creditworthy person in the eyes of the lenders and will be extremely difficult for you to avail loan in the future. Hence, credit card debt settlement affects your credit score adversely.

What can be the other way out?

Placing a request for credit card debt settlement should be your last option. You should first explore the various options that you use for clearing out the debts.

Balance Transfer Credit Card

A great option that can be exercised when you have heaps of debt piled up in your name is to take advantage of the balance transfer credit cards. Balance transfer credit cards allow you to transfer the balance on one credit card to the other credit card with low-interest rates. Sometimes during the offer period, you can even get this offer at almost no interest rates. Hence, this option can be very useful if you sincerely want to pay off your credit card debts.

Check here: List of Best Balance Transfer Credit Cards in India

Apply for Gold Loan

Another way that can be considered for paying off credit card debt is by applying for a secured loan such as a gold loan. In this case, you have to keep your gold items such as ornaments as a collateral with the bank against which you will be provided with low. Gold loan is granted to the customers by obtaining very minimal documentation. With this amount, you can pay off your credit card bills and start paying the EMI against your Gold Loan.

Seek help from relatives-

You can also ask for financial help from your relatives. Then with this amount, you can pay off your credit card bills and then return the loan amount to the relatives as and when you have. An advantage of this help is that you will not be charged with any type of interest on this. This method should be considered before you apply for credit card debt settlement.

Bottom Line

Generally, credit card debt settlement is not a great idea. Firstly, if you are using a credit card, there should not arise a situation where you have you have so much of debt piled up. It is your prime responsibility to pay off your bills well in time. You should spend only that amount using your credit card which you are sure about that you can repay. Secondly, if you are stuck with heaps of debt under your name, you should try the other ways out such as a secured loan to pay off your credit card bills. Credit card debt settlement should be the last way that you should choose as it affects your credit score badly and makes it difficult for you to avail any loan in the near future.