Credit cards are very convenient and offer flexibility at the same time, but we need to use them responsibly. Under unfortunate circumstances, paying your credit card bills can become challenging. This is when the need for credit card settlement occurs: when you are unable to pay off your entire balance, and you want to settle the debt for less.
However, it is recommended that you carry out a credit card settlement after some thought as it directly affects your creditworthiness. Use this feature only if you’re confronted with a financial hardship, as it has an adverse effect on your credit score.
Credit Card Settlement – Meaning
Credit card settlement is a strategy which you can use if you are struggling to pay your bills on time. The process involves negotiating with your credit card company to reduce the amount you owe to them. You can directly approach your credit card company or you can approach via a debt settlement company.
This process can relieve you from a hefty debt, but still, you will have to pay a considerable amount for this settlement. However, be aware that this will reflect in your credit score. So, if you are willing to settle your credit card bill, you must be well aware of the benefits and drawbacks of credit card settlement.
Credit Card Settlement – The Process It Entails
Settling your credit card dues is a lengthy process; the steps are listed below:
- Step 1: Understand your debt amount
- Step 2: Halt your payments temporarily
- Step 3: Choose which settlement option you want to go with
- Step 4: Accumulate funds for lump-sum payment settlement
- Step 5: Approach your creditors with this request
- Step 6: Start the negotiation process with your creditors
- Step 7: Reach a settlement after negotiating
- Step 8: Pay your lenders the settlement amount
- Step 9: Access your credit report
Once you contact your creditors and raise this request, explain why you’re unable to clear the entire outstanding debt. Your credit card company will consider your situation before they come to an agreement for this settlement. They may give you other options to ease your repayment process, but it is essential to pay the amount you have settled for while considering their terms and conditions.
Other Ways to Settle Your Credit Card Debt
In case you are not coming to an agreement with your credit card company, other options which you can explore are:
- Use a personal loan to pay off your credit card debt
- Do a balance transfer to a new issuer who charges less interest
- Convert your credit card bill into EMIs to pay bills in installments
- Liquidate your FD or mutual funds or bonds to repay your debt
Credit Card Bill Settlement – Risks Associated with It
The process might relieve you from debt, but it will have some risks associated with it, which are:
Decreased Credit Score
While you are in talks to reach an agreement with your issuer, you may need to stop payments on your credit card. This may lead to missed payments, which will reflect negatively on your credit report and result in a drop in your credit score.
If you are paying via a debt settlement company then the balance you need to pay is deposited into a savings account to settle your debt. The process requires you to pay 50% to 80% of your outstanding balance while settling your credit card debt. However, your credit score doesn’t recover immediately upon payment.
Also, once your settlement is processed, it is recorded in your credit report. This tag reduces your score as it signifies that you were unable to pay your debt in full.
Increased Costs
If you are directly approaching your credit card company, then you may not be able to settle for a lower amount, and if you approach a debt settlement company, then you will have to pay 15% to 20% of the agreed amount to this company. In both cases, you will end up spending a hefty amount.
High Probability of Futile Outcome
Lastly, it is a gamble as there is no guarantee that your request will be considered. You can spend months or even years to settle your dues, which may ultimately be turned down by the negotiators.
Also, there is a high potential for fraud as scammers often target individuals in financial distress. If you go for a less reputed debt settlement company, you may find yourself paying high fees without any actual progress toward settlement.
While you consider what settlement entails and plan for your future finances, it is best to opt for a credit card that has low interest rates and no annual charges. One such credit card is the One Credit Card. This lifetime-free card is easy for you to maintain. It also comes with a powerful app which can help you track your spending efficiently.
The OneCard App also helps you create budget limits and will send a notification when you are about to cross it. Apart from making it easier for you to be a careful spender, the app helps you find lucrative offers near you via GPS. You can also earn 5X rewards on your top two spending categories in each billing cycle. To enjoy deals across flight tickets, dining and more, apply now.
