How to Settle Credit Card Debt


You might feel like you’re out of options when you’re swimming in credit card debt, but that’s just not the case. Debt settlement is a viable option that helps you negotiate a lower debt amount with your creditors.

debt settlement

Instead of paying the full balance, creditors might agree to lower the amount that you owe them. The lesser amount is called a ‘settlement’ and it can be paid back in any number of ways.

It’s usually easiest to settle debts when you’ve had them for a long enough period of time and the debt collectors have almost given up and are willing to accept less money from you. Read on to find out exactly how debt settlement works and whether it could be a beneficial option for you.

What is a credit card debt settlement?

Credit card debt settlement refers to a process through which you pay off your debt at a lower sum that is agreed upon by both you and your creditors.

One way to approach debt settlement is typically through a professional company. While most are for-profit organizations, they still have the potential to save you a lot of cash since they are experts in negotiation.

When you settle debts, you generally do not make payments toward your debt until after a settlement has been negotiated. Instead, your payments temporarily go into an insured special purpose or trust account where they accumulate in advance of your payoff. The debt settlement company then makes a lump sum payment to your creditors for less than you owe.

Once an amount has been agreed upon, you will ideally be on track to reduce your debt or get it paid off completely.

How Debt Settlement Companies Charge

Debt settlement companies typically charge in one of two ways. The first is to charge you a percentage of your total debt, which is usually in the 13-20% range. Say the company you choose charges 20%.

If you owe credit card companies a total of $100,000 you would then owe the debt settlement company an additional $20,000. Another way they charge is by billing you a percentage of your negotiated debt. Since that amount should be less, the percentage charged will likely be higher, sometimes as much as 35%.

In that case, if your $100,000 credit card debt is negotiated down to $50,000 (50% of what you initially owed) then you’ll end up owing the debt settlement company $17,500.

Some debt settlement companies might also charge monthly fees while you’re in the program. These are hefty sums in either situation so it’s important to really weigh how successful you’d be if you enrolled in this type of program.

Risks of Debt Settlement

Once you enroll in a debt settlement program, you usually have to make monthly payments for 36 months. Many people end up not being able to meet this obligation and drop out of the program. If that happens to you, your debt won’t be considered settled, and you’ll be right back where you started.

More alarming is that even if you do set aside those payments, your credit card companies are not obligated to accept the proposed repayment terms from the debt settlement agency.

Plus, interest and fees may continue to grow as you wait on the negotiation process. So you could dig yourself into a hole of delinquent payments with nothing to show for it except a larger debt.

What to Look Out For

Some debt settlement companies include questionable stipulations in their customer agreements so be sure to review your contract thoroughly before signing.

For example, one current scam is to force you out of the program if you miss a single month’s payment without refunding any money you’ve already contributed to your debt settlement fund.

You should also be wary of any company requiring you to pay fees upfront before any work has been completed. The Federal Trade Commission (FTC) bans this practice among most debt settlement agencies, but there are a few loopholes that can be worked around.

Furthermore, be sure that the account you deposit your funds in is FDIC-insured. That way, in the unhappy event your debt settlement company goes out of business, your money is fully protected.

Pros and Cons of Credit Card Debt Settlement

Credit card debt settlement is a process in which you negotiate with your creditor to pay less than the full amount you owe. The creditor agrees to accept this reduced amount as payment in full, and you are released from the debt. This can be a suitable option if you are unable to pay your credit card bills, but it can also have some drawbacks.


  • It can reduce the amount you owe, which can make it easier to pay off your debt and get out of financial trouble.
  • It can also lower your monthly payments, which can make it easier to budget and manage your finances.
  • In some cases, it can also reduce or eliminate interest and late fees, which can further reduce your debt burden.


  • It can hurt your credit score, as settling a debt is seen as a negative mark on your credit report.
  • It may also be pricier in the long run, as you will typically have to pay fees to the debt settlement company or attorney handling your case.
  • If you are current on your payments, creditors may not be willing to negotiate with you as they usually prefer to work with delinquent borrowers.
  • It may also take some time to negotiate a settlement, and in the meantime, your creditor may take collection actions such as calling you or sending you letters.

Can debt settlement damage my credit?

When undertaking debt settlement, you also run the risk of damaging your credit score even more. That’s because the debt settlement agency typically instructs you to stop paying on your balances during the negotiation process. Meanwhile, those payments will likely be reported to the three major credit bureaus as delinquent on your credit report.

Some studies show the average consumer’s credit score drops between 65 and 125 points during the debt settlement process.

And in a worst-case scenario, you could have a lawsuit filed against you for the amount owed. If the creditor wins the lawsuit, you may be subject to having your wages garnished to pay off your debt.

Choosing a Debt Settlement Company

If you decide to work with a debt settlement company, there are a few things to look out for to make sure you’re working with a reputable one. First, look for companies that are licensed to do business in your state. That will help narrow your list down right from the get-go.

It’s also important to find out if the debt settlement company has a minimum debt amount it requires. Most companies require you to have at least $7,500 to $10,000 in credit card debt, although some do work with lower amounts.

Check Out Our Top Picks for 2023:

Best Debt Settlement Companies

Next, dig deeply to understand the company’s fee structure. It might be helpful to scour the website and talk to a customer service representative with any follow-up questions you may have.

Generally speaking, the more detailed the company’s website is, the better service you’re likely to receive. The same holds true about the knowledge of the customer service department.

Just remember that regardless of what you read or hear, it’s still your responsibility to review your specific contract line by line to understand the exact terms and agreement.

Debt Settlement vs. Bankruptcy

Debt settlement and bankruptcy are two different approaches to the same problem: overwhelming financial debt. One of the main differences between the two methods is how they affect your credit score.

Debt settlement typically only lasts for seven years, while bankruptcy can last up to ten years depending on the type of bankruptcy you choose.

A Chapter 7 bankruptcy stays on there for the full ten years and while it can wipe out unsecured debt, it does have specific income limits. If you make more than the maximum allowable amount, you won’t be able to qualify. Even if you do qualify, be wary of personal property that may be possessed to go towards your owed amount.

A Chapter 13 bankruptcy only stays on your credit report for seven years but doesn’t have an income cap for eligibility. However, you will be required to make payments to your creditors for up to five years.

You typically have one monthly payment based on your income and other expenses, which is then distributed among your creditors. After that time, your debts are considered settled, and you can begin the financial recovery process.

Debt Settlement vs. Debt Consolidation

Debt settlement entails negotiating a lower balance with your credit card company and paying it with a lump sum. Debt consolidation uses an entirely different method to relieve your financial burden.

It involves taking out a personal loan and paying off all (or some) of your creditors with those funds. You then have a single loan to repay rather than many scattered payments.

Ideally, you want to qualify for a lower interest rate than your other loans and credit cards so that you save money over time. You can usually take out a personal debt consolidation loan over the course of several years.

Compared to a credit card balance, having a regular installment loan payment can be reassuring because you’re working towards a specific end date.

Credit Counseling

Credit counseling is another option to reduce your credit card debt. Credit counseling agencies will help you set up low interest debt management plan to help you pay off unsecured debt over time.

Their debt management programs reduce your monthly payments so you can pay off your credit card debt in full. These programs typically hurt your credit scores pretty bad. So, if you’re just looking to reduce your debt payments, you may want to consider a debt consolidation loan first.

DIY Debt Settlement

The best way to negotiate a credit card debt settlement could be doing it yourself. There’s no need to hire a professional to do it for you, if you know what you’re doing. And by negotiating with a creditor on your own, you save on fees.

Usually, you just need to call the credit card company to clearly and politely explain your financial situation. Ask them for exactly what you want. The worst they can say is no. And even if they say no, you can always call back and talk to someone else. You can even do this several times. And don’t be afraid to ask to speak with a supervisor.

Once you find someone at the credit card company who is willing to negotiate, make sure you get everything in writing. You can even have them shoot you an email while you’re on the phone with all the details that have been discussed.

Keep in mind that if a creditor forgives any part of your debt greater than $600, you’ll have to pay income taxes on that amount.

Secured Loans vs. Unsecured Loans

Depending on your credit history, you may qualify for either a secured or unsecured loan. An unsecured loan is usually a better option because you don’t have to use your personal property as collateral.

A secured loan, on the other hand, requires you to use something like your car or jewelry as collateral on the loan. This helps protect the lender in case you default on your payments.

Debt consolidation is typically considered less risky than debt settlement, but you still need to examine your personal finances to determine the best way for you to get out of debt.

Any debt relief program comes with a slew of pros and cons. Don’t make any decision until you properly weigh each one. After all, any choice you make will likely last at least a few years, so it’s imperative that you make a decision that works for you today and in the future.

Balance Transfer Credit Cards

Balance transfer credit cards often have an introductory 0% APR for 12 or 18 months. This allows you to focus on paying down the principal balance of your card instead of just the interest. It can be a good way to save money on interest if you have a high-interest credit card or loan and are having trouble paying it off.

Keep in mind that you typically need a good credit score to be approved for 0% balance transfer cards. So, it is best to start the process as soon as possible rather than waiting for debt to accumulate.

See also: How to Do a Balance Transfer on a Credit Card

Lauren Ward
Meet the author

Lauren is a personal finance writer who strives to equip readers with the knowledge to achieve their financial objectives. She has over a decade of experience and a Bachelor's degree in Japanese from Georgetown University.