Back To Article Index

The Benefits of Credit Card Debt Settlement

Many approach debt settlement by focusing on the negative results; however, the benefits of credit card debt settlement should not be ignored.

The Process of Credit Card Debt Settlement

Whether handled by the debtor himself, an attorney or a debt settlement firm, the process of settling credit card debt is essentially the same. The creditor and debtor agree to an amount of debt that is lower than the original debt, and payments are usually negotiated which are lower than the former monthly minimum. The benefits of credit card settlement are essentially that both creditor and debtor “win.”

Benefit to the Debtor

The obvious benefit to the debtor is the immediate relief of lowering overall debt and lowering monthly payments to an affordable amount. Other benefits should not be overlooked, however:

1. The debtor, over the long term, pays much less in finance charges. Monthly interest is now being charged on a smaller total debt amount, the amount applied to the principle balance each month is larger, and the total finance charge over the life of the debt is less.
2. The debtor is able to experience much less of the anxiety over overwhelming debt. He now sees an end to the debt in sight. This reduction in stress will reduce the resultant physical ailments which usually accompany stress and worry. Familial harmony is usually restored as well.
3. If the debtor has also achieved a settlement which will not be reported by the creditor, the credit score can actually go up, and it will continue to rise as payments are made on time.
4. With lower total debt and a good credit score, the consumer will be able to obtain “good” debt at a much lower rate of interest. Mortgage lenders look at total debt and credit payment history when deciding interest rates on home mortgages. The better the history and the score, the lower the interest rate.

Benefit to the Creditor

Do not be fooled into thinking that the creditor is losing on this deal. Most creditors who are trying to collect debt that has been on the books for a lengthy period of time would rather settle with you than turn the debt over to a collection agency or “sell” the debt for pennies on the dollar to a collection firm. If an original creditor gets 25% of the original debt, he will be thrilled, because that is more than he will get through other agencies. Further, any amount that is not paid can be taken as a loss at tax time. If a debtor ends up declaring bankruptcy, the creditor gets nothing at all. So, it is in the creditor’s best interest to settle this debt as well.