Is Credit Card Debt Settlement Worth the Credit Score Hit?
- Credit card debt settlement could cause a substantial drop in your credit score.
- It may be better than staying in credit card debt, especially if you don’t envision a way out.
- You could spend decades in credit card debt if you’re paying the minimum, whereas debt settlement can take as little as 24 to 48 months.
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When you’ve been struggling with credit card debt for a long time, debt settlement could open the door to a better financial path. It’s great that you’re scouting some options to get to a brighter financial future. At the same time, you may be understandably concerned about the impact a settlement will have on your credit score.
It’s true that credit card debt settlement often damages a person’s credit. Even so, it might be the best move you can make to set yourself on more solid financial footing.
How Debt Settlement Impacts Your Credit
During debt settlement, you may decide to stop making payments on your credit cards. Creditors are usually only willing to negotiate debt if the account is past due; if you're still current on your payments, creditors may not believe you're struggling.
When you stop making payments, creditors will report your accounts as delinquent on your credit file. This could cause a large drop in your credit score, because the most important factor in your credit score is your payment history.
After you settle debt on a credit card, the creditor will likely close the card and report the account as settled for less. Settled accounts could also hurt your credit, as they show you didn’t pay your debt in full.
Damage to your credit score is temporary. Most negative items, including late payments and settled accounts, come off your credit report entirely in seven years. They also have less of an impact as time goes on. If you take the right steps to rebuild your credit after debt relief, your credit score should gradually recover.
The Cost of Staying in Credit Card Debt
Sure, your credit score could take a hit during and after debt settlement. But staying in credit card debt also has its downsides—especially if you’re making little to no progress on paying it down.
To provide some real numbers, let’s say you have $25,000 in credit card debt and you’re paying the minimum every month. The APR (interest rate plus other fees) is 20%. If you continue to only make minimum payments, you could be in debt for 437 months—over 36 years—and pay $41,057 in total interest charges.
And that’s assuming you don’t spend any more money on your credit cards as you pay off your debt. If you keep using your cards, you could stay in debt indefinitely, with growing balances and increasing monthly interest charges.
Avoiding debt settlement doesn’t necessarily mean your credit score will be safe, either. Your credit score could still suffer if you have high credit card balances. High credit utilization, where you’re using most or all of your credit limit, is bad for your credit score. If you can’t keep up with your payments, then your credit score has probably already dropped from that as well.
On the other hand, a professional debt settlement company could help you negotiate your debts, and you could settle all of your enrolled debts in as little as 24 to 48 months. Often, debts are settled for less than you owe. In some cases, debt settlement could be a faster, more affordable way to get rid of your credit card debt.
When Credit Card Debt Settlement Is Worth It
Here are the most common signs that credit card debt settlement could be right for you:
You’re struggling to make the minimum on your credit cards, or you've already fallen behind on payments.
Debt payments are taking up a large chunk of your monthly income to the point that you’re having trouble paying your other bills.
You’ve already considered filing for bankruptcy or joining a debt relief program.
Financial stress and anxiety are affecting your quality of life.
You’re unsure how you’ll ever pay off your credit cards and don’t have a way out.
Debt settlement isn’t the right solution for everyone. If you’ve figured out a repayment plan and expect to have your credit cards paid off in a few years, you’re probably better off following that plan. If you currently have a good credit score, you may be able to qualify for other payoff methods, such as a debt consolidation loan.
If you’re really struggling, consider credit card debt settlement. It’s not an immediate fix, but it could get you on the path to freedom from debt.
Prioritize Your Financial Stability
Your credit score is important, but what matters most is your financial stability. Too much credit card debt can make it hard or even impossible to get ahead.
Your debt could keep growing with hefty interest charges every month, and the required payments get in the way of saving any money. Even if your credit score is fine for now, excessive credit card debt could eventually cause it to drop.
Focus on your total financial health and not just your credit score, which mainly comes into play when you’re borrowing money. If you’re ready to take control of your debt, find out how Freedom Debt Relief works and talk to a Certified Debt Consultant today.
Author Information
Written by
Lyle Daly
Lyle is a financial writer for Freedom Debt Relief. He also covers investing research and analysis for The Motley Fool and has contributed to Evergreen Wealth and Monarch Money.
Reviewed by
Kimberly Rotter
Kimberly Rotter is a financial counselor and consumer credit expert who helps people with average or low incomes discover how to create wealth and opportunities. She’s a veteran writer and editor who has spent more than 30 years creating thousands of hours of educational content in every possible format.
Is credit card debt settlement a good idea?
Yes, in some situations. Credit card debt settlement may be a good idea if you’re struggling with debt. There’s no one-size-fits-all solution to getting rid of debt, but debt settlement could make sense for those who can’t keep up with their monthly payments or are only paying the minimum.
What is the disadvantage of credit card settlement?
Credit card settlement could negatively impact your credit score if you stop making payments during the settlement process. Card issuers will most likely close your credit cards and mark the accounts as settled for less on your credit report.
How long does credit card debt settlement take?
Many people settle their first debt within a few months. The entire credit card debt settlement process for all enrolled debts could take 24 to 48 months. The exact timeframe depends on several factors, including how quickly you can save the money for a settlement offer, the amount of debt you have, and whether you negotiate on your own or work with a professional debt settlement company.