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Think debt settlement is the right path forward for your credit card debt? Learn how to get through the process with better financial results.

4 minute read

There are a few things you should know before you jump into credit card debt settlement. First, what does it even mean? Settling debt means paying back less than what you owe. For credit card debt, that means the credit card company or a debt collection company signs an agreement stating that you can pay back a smaller percentage of your debt.

how to settle credit card debt; debt settlement papers with an approved stamp

Paying less than what you really owe sounds great. Unfortunately, the process can go wrong – and majorly mess up your credit score, too. Learn the different methods you can use to avoid too much credit damage, plus all the steps you need to take to complete your debt settlement journey.

Before you begin…

It’s imperative to keep written records of all communication between you and your credit card company or debt settlement company. That way, if anything goes wrong, you have proof of every interaction and agreement. Ask for physical copies of all documents and keep them organized in your own records.

Step 1: Verify your debt.

Make sure that the debt is yours and that it hasn’t passed the statute of limitations. If you learn about the debt through a phone call, ask if you can receive all the information in the mail. That way you can verify the debt itself and the company that’s calling you. If it isn’t actually your debt, you can send in a dispute letter to correct the error.

Read tips for writing a good dispute letter »

You also want to verify whether or not the debt is still within the statute of limitations. This is the timeframe during which companies can still take legal action against you for your debt. If you agree to make a payment before you know that the statute of limitations has expired on your debt, the statute may reset and you will be legally liable again. In some states, even acknowledging that you owe the debt can reset the statute, so be careful what you say if a debt collector calls you.

Step 2: Negotiate a settlement for your amount of debt.

There are a few different paths you can take to negotiate your credit card debt. No matter which method you choose, make sure to evaluate your own budget first. What kind of payment plan could you afford? Could you manage to pay off the full amount in a lump sum payment? If you choose monthly payments, how much could you reasonably fit into your budget?

Option 1: Do-it-yourself credit card debt settlement

Dust off your debate skills for this method. To settle your credit card debt yourself, you’ll need to reach out to your credit card company and try to get them to accept less than what you owe.

Learn the process of DIY debt settlement »

Option 2: Working with a debt settlement company

There’s also the option of working with a debt settlement company. This is usually a better option for those with multiple credit card debt accounts. The settlement company will negotiate with your lenders for you, and you will pay one monthly bill to the settlement company itself without having to worry about individual bills or interest rates.

Get matched with the right debt settlement company for your needs.

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Option 3: Try a debt management program instead

Depending on your amount of debt, a debt management program (DMP) may be a better choice for your financial situation. Debt management programs help you make a budget and pay off your debt in full. This differs from a settlement, which means you are paying less than you owe. With debt management, you repay the balance you owe in full, but reduce or eliminate interest charges. Since you repay the principal in full, you can avoid the credit damage caused by settlement.

Find out how debt management programs work for credit card debt »

Step 3: Protect your credit reports.

Settling your debt can majorly affect your credit. The ways that your settled debt shows up on your credit report have drastically different effects on how future lenders see you, and your credit scores will also be affected. If you don’t ensure that your settled debt is reported to the credit bureaus in a certain way, then it can seriously hurt your credit scores. Ask your lenders to report your settled debt as “paid as agreed.” This is still a negative item on your report, but it’s not as harmful as default or charge-off.

Find out how long debt settlement will stay on your credit report »

Step 4: Don’t forget your taxes.

You may have to pay taxes on the amount of forgiven debt, which is the amount you ended up not having to pay because of your settlement agreement. Take this into account when planning your budget for the year. You don’t want to settle your debt just to get into tax debt later.

Read more about debt settlement and taxes »

Getting Professional Help

Settling your credit card debt is something that’s often best left to a professional. This is especially true when dealing with high amounts of debt on multiple cards. A representative from the debt settlement company you work with will guide you through the process and present you with different options depending on your circumstances. In short, following the steps presented here may work for figuring out how to settle credit card debt, but working with a professional debt settlement company could be a better fit for your needs.

Get started on your journey to credit card debt relief.

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Published by Debt.com, LLC