What is Credit Card Settlement and How does it Work?

byMehak BaglaLast Updated: August 17, 2022
Credit Card Settlement

The only important thing to note about a credit card is that one must use it wisely. Think at least once before you make a spend using your credit card. But why?

Well, not because credit cards are “bad” financial instruments, but because they may give you a handful if you try to use them too much.

The habit of using a credit card is such that you are quite capable of taking the liberty of credit more than you should. From one purchase to the next, credit cards will allow you to buy all that you want but at what cost? It is important to understand that whatever you buy using your credit card today, you must repay tomorrow. And if you go beyond your income, you might fall prey to huge debts, which would eventually get difficult to repay by the day.

Not only the accumulated spent amount, but also the interest amount that gets applied on your unpaid balances- all of it leaves you in huge trouble. Hence, it is better to use this financial instrument wisely, than to regret using it later. Here are a few details on why it is as important as it sounds!

What Credit Card Settlement Means?

Credit card settlement is basically a mutual agreement between the credit card holder and the bank/credit card issuer that helps the credit card holder when it becomes too difficult for him/her to keep up with the credit card dues. This might be because of multiple reasons, from actual financial emergencies to reckless expenses on credit cards. Irrespective of which, the conclusion causes too much burden on the credit card holder, and causes severe financial stress since the debt multiples every month and there seems to be no way out of it.

In such situations of financial panic, a settlement is proposed by the banks/debt settlement agencies between the credit card issuer and the credit card holder. In such cases, the credit card holder is advised to either opt for a lump sum payment in exchange for a complete waiver or directly request for a settlement.

It must be noted that credit card settlement is done in extremely rare cases and the credit card issuers do not encourage it as an option for the debtors. There are minimal chances in which the credit card issuers agree for a settlement, unless you make a lump sum payment. Moreover, the credit card settlement percentage depends on the credit card issuer and your ability to negotiate on the amount.

Does Credit Card Settlement Affect Credit Score?

Since credit card settlements indicate your irresponsible financial behavior, and your inability to manage/repay your credits, it is as bad for your credit score as financial bankruptcy is. Credit card settlement drastically reduces your credit score and hence, almost eliminates your chances of getting any form of credit in your near future. You might need several years to recover from your credit card settlement. This is also majorly because a credit card settlement is recorded as a black mark in your credit history which lasts upto a minimum of 7 years.

How to Go for Credit Card Settlement? The Process

You can initiate credit card settlement by following these steps-

  • Visit a debt settlement agency or reach out to your credit card issuer
  • Briefly explain your inability to repay your credit card bills in a credit card settlement letter
  • Also, mention that you are open to negotiating with other repayment terms in your letter
  • Next, you may offer a lump sum payment to your credit card issuer or else, file for bankruptcy
  • Your issuer may either accept or deny your credit card settlement. If at all, it gets approved, you may be offered a repayment plan on the basis of your current income

Credit Card Settlement – A Good or a Bad Thing to do?

Declaring yourself bankrupt would probably be the last thing you want to do in your lifetime. Credit card settlements are no less. While such settlements may seem to be the last resort in case you have acquired yourself a huge financial burden, you should try to avoid them as much as possible because of their drastic impact on credit score. Hence, even if you opt for such a settlement, you must try your best to negotiate with the credit card issuer yourself, thus avoiding the fees associated with hiring a debt settlement agency.

Alternate Options to Credit Card Settlement

If you still believe that there is a slight chance for you to get out of credit card settlement, you must try to opt for either of these options-

  • Credit Card Balance Transfer

If you have too much unpaid balance on a credit card, you can choose to transfer your balance from one credit card to another. This will help if the other credit card has a lower or no interest rate on the unpaid amount for a predetermined time period (upto 3 months, in most cases). The credit card issuers offer this option and charge interest only after this predetermined interest-free period is over. Hence, this option is suitable only for those credit card holders who can clear their bills within the predetermined time period as offered by the other credit card issuer. Alternatively, for those who cannot repay their bills within the specified time period, some credit card issuers allow users to turn their transferred balance into EMIs.

  • Look out for alternative credit sources

If the credit card debt becomes too much for you to repay in the given time period, you can borrow credit from some other source to pay your credit card bills. You may borrow a personal loan from a bank, get a top-up home loan, or a gold loan to pull yourself out of the credit card debt trap. You may also seek to borrow a loan on a personal level. This would be helpful as the interest rate on the amount borrowed from these sources is relatively lesser and you will get additional time duration to clear off your dues.

How to stay away from such situations?

Follow these instructions to keep away from landing into such situations that may ask you to opt for credit card settlements-

  • Sign up for the auto-pay feature on your credit card’s mobile application/online portal
  • Set up timely reminders for your due dates
  • Pay before time- Do not wait until the last minute to pay your credit card overdue
  • If you are really short of finances, then pay at least the minimum amount due before the last date. The remaining balance can be paid in the interest-free period
  • You may take a personal loan if you have reached a stage where paying your credit card dues does not seem possible to you as these loans have lower interest rates
  • You can request your bank to convert your outstanding balance into easy, affordable EMIs, which you can pay over a specified period of time
  • As an alternate, you may also transfer your credit card balance to another bank’s account and pay the sum through regular EMIs

To Conclude:

All in all, it is best to avoid landing in such a situation where you have even the slightest chance of not being able to repay your credit card bills. It is better to keep yourself away from landing in such situations than to suffer later. Try to make minimum use of your credit card. Even if you use it quite often, ensure that your monthly credit card bill does not exceed your monthly income. Ensure that you spend only on what you can actually afford and keep clearing your bills well in time to maintain a good financial health.

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What is credit card settlement?
Credit card settlement is basically a mutual agreement between the credit card holder and the bank/credit card issuer that helps the credit card holder when it becomes too difficult for him/her to keep up with the credit card dues.
Is it okay to opt for credit card settlement if I am not able to repay the debt?
It should not be okay to opt for credit card settlement in any case. Credit card settlement should be the last option that you choose in case of a huge financial burden.

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