As of this writing, the interest rates for credit cards are between 17 and 17.26%. With rates that high, the balances on a debtor’s credit cards can quickly snowball if the debtor maxes out his or her cards. If the debtor can only afford to pay their minimum payments each month, they can end up paying hundreds of dollars every month in interest – ouch!
If you’re being hammered by mounting credit card debt and interest, you may be considering credit card debt settlement as a possible solution. But what does it involve exactly? Does it mean the credit card company agrees to a settlement and you walk away with your credit unscathed? No, that is not how it works. Your credit will take a hit, but more on that later.
How Credit Card Debt Settlement Works
For starters, the only way for credit card debt settlement to work, you’ll need some cash laying around or you’ll at least need access to cash. What you would do is make an offer to the credit card company in hopes of it accepting to settle for less than what you owe. For example, you might offer a credit card company $5,000 for a card with an $8,000 balance.
Be aware of the cons of credit card debt settlement:
- You have to have the cold hard cash available to pay the full settlement amount. You cannot settle and enter into a payment plan.
- You need to get the credit card company’s acceptance in writing, otherwise they can say they never accepted such an offer.
- The settlement will reflect on your credit report, and it will not reflect positively.
- If you stop paying your credit cards in an effort to save enough money to make a settlement, in the meantime the creditor can sue you for the debt, obtain a judgement, and seize your bank accounts and garnish your wages.
- If you elect to use a debt settlement company, you could be walking right into a scam.
- If you settle on a credit card, it creates an income tax liability. When the creditor forgives a portion of the debt, the state and the IRS view that debt forgiveness as income. So, you will have to pay income taxes on it. Surely, you don’t want that.