Deciding whether to settle a credit card debt

Do you have a lump sum to offer? Are you ready for the credit score hit?

Question Dear Credit Wise,
I have four credit cards with a debt that totals $16,000 and my credit score 625. Is it possible I can settle the credit card debt? -- Grace

Answer Dear Grace,
The answer to your question is ... maybe.

I have two questions in return. First, do you have a substantial amount of money set aside to offer as settlement? And then the second, more important question is: Should you really do this? 

In order to settle a credit card debt with your original creditor, you will need to demonstrate a need or a hardship reason for the settlement. Your agreement with your credit card company was that it would extend you credit for your use and you would pay back the credit it has extended, usually with interest. Just because you don't want to pay the full amount you owe is not a reason for the creditor to agree to a settlement.

This is especially true if your accounts are current and up to date. The creditor is perfectly happy to accept minimum payments from you, even if those minimum payments will keep you in debt for many years. 

If you have fallen behind or are in danger of falling behind on your payments, you may be able to demonstrate a need to settle that the creditors will accept. For instance, if you have experienced a loss or reduction in income or have increased medical or other expenses, your creditors might agree to work with you on settling the debt.

If you are seriously behind and your debts have been sold to a third-party collector, you may be able to come to terms with that party to settle the debt. Be warned, though, that in order to do this you will likely have to have a lump sum in hand and be ready to offer it when you call. 

Whether you deal with the original creditor or a third party collector, don't agree to any arrangement that you cannot afford. Be sure to get any agreement in writing.

You also need to know what debt settlement will do to your credit score. Your score right now is on the low end of what is considered in the reasonable credit range, making you a moderate credit risk. This means you can probably get credit if you apply, but not at the best rates. Settlements are second only to bankruptcy in the amount of damage they do to a consumer's credit score. While you may not need credit now, chances are there will come a time when you do need to borrow and this decision may haunt you down the road, because you will not come out of this with the same score. 

Be wise with your credit!

See related: Step-by-step credit card debt negotiation

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Updated: 01-20-2018