The typical American household is carrying average credit card debt of $9,333 according to recent research. If you’re among them, you may be dealing with overwhelming debt and looking for a viable solution. Fortunately, there are several options for resolving your debt and debt settlement may be one of them. Once you assess the risks and benefits, debt settlement plans can offer many consumers a way to get out of credit card debt within mere months. Here’s how to settle credit card debt.
What is credit card debt?
Credit card debt is unsecured consumer debt. If you carry a revolving balance (i.e., balance carried month to month), have high interest rates and can only pay the monthly minimums, this debt can begin to mount. Once a payment is missed and penalties are charged, you may begin to feel overwhelmed.
How to settle credit card debt
When you are typically 5 months late (and at least 90 days late in some limited instances) on payments, you can negotiate with creditors to settle your debt for less than the balance on your account.
Michael Bovee, co-founder of Resolve, explains that credit cards are the most common type of debt that can be negotiated and settled for less than the total balance owed. Some features of credit card debt make it potentially easier to settle than other forms of debt. Bovee explains that banks have longer to charge off (i.e., report as a loss) credit card debt than they do other loans, which can give you more time to negotiate.
Related article: What does it mean to have my unpaid debt charged off?
Is debt settlement right for me?
Your first step is to assess if debt settlement is the right option for you. You’ll need to:
- Consider who your lenders are and understand their policies for resolving delinquent accounts
- Know your balances and your available funds
- Understand the impact on any short-term financial goals
- Accept the impact to your credit scores
If you don’t think you can settle your accounts with more aggressive banks quickly enough, Bovee suggests that debt settlement is likely not the right option for you.
To settle your accounts, you or your representative will need to contact your creditor (or their representative, such as a collection agency or collection lawyer) to negotiate a payment amount less than your current balance. You’ll also need to agree to a one-time payment or payment schedule.
Credit card debt settlement programs & options
Many traditional debt settlement companies charge fees of as much as 20-25% of your total debt balances. Some will even charge you before they begin to save you any money. And because these companies charge such high fees, they can become part of the problem. Charles Phelan, ZipDebt founder, coaches people on how to negotiate for themselves. Debt settlement, he explains, is built into the bank’s process. He has found that the main thing consumers want is comfort and guidance as they go through the process.
Settle credit card debt: a DIY approach
For those who want to negotiate their own debt settlement, Bovee explains that it’s important to understand each of your creditors and determine the best time to contact them to settle. This is usually after you are 90 days late on payments but before they charge off your account (this must happen by day 180). He says you should consider the following as you plan your negotiation:
- Timing: Determine which creditor to deal with first based on who will be most aggressive and sue the soonest, and on how much money you currently have. You’ll need to have the funds available when you make your agreement. Next, figure out which creditor to hold off paying until the end, then fill in the middle from there.
- Resources: Know your cash flow. Assess when you will have the funds for each account. Determine if you have other funds, like a loan from a friend or from selling something that you can add to what you set aside each month.
- Intel: You need to know how to implement the plan at each phase on a per-creditor basis. You’ll need to understand the nuances of each creditor’s policies to maximize the outcome.
Related article: How to negotiate credit card debt settlement by yourself
Figuring this out can be difficult on your own. Services like the Resolve platform can sort through your creditor list and prioritize creditors who need to be paid first. Resolve also offers an estimate spread of what to shoot for when negotiating a settlement.
Once you figure out these essentials, you can plan when to make your calls to your creditors. Negotiating a settlement might take one call or many, so be prepared for follow-ups. When you finally reach an agreement, it’s critical to get it in writing before making a payment.
How to settle credit card debt before going to court
Debt settlement does not protect you against being sued. However, you can reduce your risk by:
- Negotiating your past-due debt before it is charged off (before your debt is 180 days past due)
- Determining which of your creditors are most likely to sue and settling with them first
- Completing your settlement plan, if at all possible, within 12 months in order to greatly reduce your risk of being sued
Related article: How to settle credit card debt before going to court
Risks and alternatives to credit card debt settlement
To determine if debt settlement is the right option for you, assess the risks and learn about the alternatives. Debt settlement impacts your credit scores because you typically cannot begin to negotiate until your account is at least 90 days late (late payments have one of the biggest negative impacts on your credit). You may also be required to pay taxes on any debt that your creditors write-off. And remember that debt settlement does not protect you against lawsuits.
Some other debt resolution options to consider include:
How Resolve can help
If you’re dealing with debt and not sure what to do, we’re here to help. Become a Resolve member and we’ll contact your creditors to get you the best offers for your financial situation. Our debt experts will answer your questions and guide you along the way. And our platform offers powerful budgeting tools, credit score insights and more. Join today.