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How to settle your credit card debt for much less

Consumer Reports News: June 16, 2009 02:09 PM

As we reported in the June issue of Consumer Reports Money Adviser and an article in the New York Times reports today many credit card issuers increasingly are willing to settle delinquent credit card debt for significantly less than the amount owed. 

Why this about-face in an industry where profitability was very often based on customers continually carrying big balances loaded with high interest rates and fees?  Self-interest certainly has something to do with it.

Banks are required to write off your account as bad debt after six months of non-payment, and at that point they typically place the account with a collection agency in hopes of recovering at least some of that money. But the amount banks get per dollar of debt from collection agencies dropped by more than half in 2008, to as little as 6 cents on the dollar.

That decline, along with mounting unemployment and credit card delinquency rates, gives issuers more incentive to negotiate with cardholders earlier in the collection process. Our reporting revealed that in the past, card companies weren’t willing to consider settling for 50 cents on the dollar until customers were at least 180 days delinquent, but now many consider that kind of settlement only 90 days after the first missed payment. 

How it's done

To obtain such a deal, you’d generally need to be able to come up with a single lump sum payment or just a few hefty monthly payments, and a realistic settlement goal would be about half of the balance that was due when you made your last payment.

Bear in mind, however, that negotiating a settlement comes with many negatives.  For one, your account will be closed and your credit rating will be trashed if it’s not already. What’s more, those calls from debt collection agencies that come when you’re behind on payments will not cease until you have successfully negotiated a deal. If the amount of debt the card company agrees to forgive exceeds $600, you also may owe income taxes on it. 

But if you are up against the wall and aren’t in the market for credit in the near future anyway, calling your card company and asking to speak to a supervisor if necessary to negotiate your own debt settlement is a last resort worth considering.

It is definitely better than responding to the barrage of ads from debt settlement companies that promise to cut such deals on your behalf.  Such companies charge fees that can run into thousands of dollars, much of it due up front, with no better prospect of success than you have by doing it yourself.  In fact, some debt settlement companies actually have been charged with scamming consumers.–Andrea Rock


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