Credit card settlement is not a fresh-out-of-the-box concept. In fact, credit card issuers always prepare for the possibility that you may not pay the bill on time. This can happen due to various reasons, as credit card bills often take a backseat when you don’t have enough funds to meet all your financial requirements.
To avoid losing money due to default, credit card companies allow you to negotiate or apply for a settlement process. Here is everything you need to know about credit card settlement.
Why Issuers Negotiate Debt
Issuers know that missing a few credit card bill payments is a slippery slope that can land you into a debt trap. With every unpaid credit card bill, they charge you interest on the due amount. This can increase your debt, which can be challenging to repay instantly.
This way, the risk of losing money increases for the issuer every month. In such a case, the issuer can take the matter to court or give you a chance to negotiate to settle your debts. The second option is more practical for the issuer to recover the funds and maintain its reputation and relationship with the borrower.
Different Ways to Negotiate Debt
The following are three options issuers generally give you to settle your payment of credit card dues.
-
Opt for Lump-Sum Settlement
With this option, credit card issuers allow you to pay only a part of the due amount and dismiss the rest. Generally, you must pay the principal and interest will be waived. This reduces your total payable bill so you can easily repay it and become debt-free. However, it has two downsides.
Firstly, your credit report will mention that you’ve settled your debt for a lower amount. This can negatively affect your future prospects of borrowing. Secondly, the forgiven debt amount can count as income. So, if you are settling a large debt, your income tax liabilities will be affected.
-
Get a Hardship Plan
This is a program where the issuer offers leniency when you are having financial hardship. Opting for this, you can get a lower interest rate, reduced EMI or a waiver on the fees temporarily.
Some issuers also allow you to skip some of your credit card bill payments. This plan is ideal in case of unexpected job loss, medical crisis or any other circumstances when you need temporary financial relief.
-
Sign a Workout Agreement
This type of agreement is where the issuer reduces your annual interest and forgo all the associated fees and charges for a fixed period. You can pay your full credit card bill within this duration, and the issuer closes your account.
The normal interest and charges apply to the outstanding balance if you cannot pay the dues within the deadline. As it ends with the issuer closing your account, your credit score will take a hit.
Steps to Negotiate Credit Card Debt
After knowing your options, here is the process you can follow for debt settlement.
-
Step 1: Calculate Your Total Debt
Before contacting your issuer, check your account balance and calculate your total balance. This will help you analyse the best plan and approach for settlement.
-
Step 2: Review Your Option
Choose the best plan depending on your debt amount and current financial situation. Select the option that helps you lower your financial burden in the shortest time.
-
Step 3: Communicate With the Issuer
Informing your credit card company about your financial situation is important to negotiate the best terms. It’s best to leverage your good credit behaviour in the past to present your case.
-
Step 4: Negotiate for the Best Plan
You know what works best for you since you’ve done all the research. Nevertheless, consider the recommendations from the issuer.
-
Step 5: Follow the Decision Plan
Plan your debt according to your chosen option and avoid missing the due today, as it can create setbacks.
-
Step 6: Get a Written Confirmation
Once it’s settled, get a confirmation document for future reference.
While credit card settlement is a viable option to deal with your finances, it can damage your credit score. You should also remember that the credit card issuer can reject your request to settle your debt. The best method to avoid all this is to get a credit card that’s suitable for your financial capacity and gives you many savings options. One such card you can consider is One Credit Card.
It is India’s first metal credit card designed to give you a peaceful shopping experience with the best security. Its highlighting feature is the reward program which allows you to earn 5X points on your top two spending categories every month. It comes with many other perks, such as add-on credit cards for 5 family members, seamless onboarding, travel benefits, etc.
You can enjoy exciting offers and discounts on all your online and offline purchases. You can also easily convert big ticket purchases into affordable EMIs from its online credit card app without needing approval. Apply online for this lifetime free credit card and enjoy all its benefits.
