Credit Card Settlement: What is It & What’s the Process?

No reviewer selected.

If the mounting pile of credit card dues is making you anxious, and you cannot pay off the debt no matter what you do, it may be time for credit card settlement. But what is it, and how does this process work? What is the credit card settlement process? Keep reading to learn more.

What is a Credit Card Settlement?

If you miss a credit card payment, the bank might seek to recover a portion of the amount you owe, even if it’s not the full balance. To resolve the debt, you can negotiate with your credit card issuer to pay less than the total outstanding amount, which will help you clear the debt more quickly. Alternatively, the bank might agree to stop charging interest on the remaining balance.

How Does Credit Card Settlement Work?

Settling credit card debt requires thoughtful planning, a well-executed strategy, and a clear grasp of the risks and benefits involved. Here’s an overview of how the credit card settlement process typically unfolds:

Negotiating with the card issuer

The cardholder and the credit card issuer engage in discussions to adjust the outstanding balance. This usually involves presenting evidence of financial difficulties and making a strong case for why the issuer should agree to accept a reduced payment.
Lump-sum payment

Instead of continuing with potentially burdensome monthly instalments, the cardholder makes a one-time payment that’s lower than the total amount owed. This agreed-upon lump sum settles the debt.
Impact on credit score

Although settling can provide immediate financial relief, it may have a negative impact on your CIBIL score . The settlement will be noted on your credit report, which might cause future lenders to view your creditworthiness cautiously.

Credit Card Settlement Process

Grasping the credit card settlement process is crucial for anyone looking to tackle their outstanding credit card debt.

Written Agreement

It’s essential to have every detail, such as the settled amount and payment timeline, documented in writing. This ensures transparency and meets legal requirements, creating a binding contract between both parties.
Making the Payment

The cardholder is responsible for paying the settled amount, whether as a lump sum or in agreed-upon instalments, following the terms outlined in the agreement.
Account Closure

After the payment, the account is closed, and the credit report notes the settlement. This closure signifies the end of a well-managed process, though it comes with a potential impact on the CIBIL score.

Is Credit Card Settlement Beneficial?

Credit card settlement is not the best option as it is a sign that you are declaring bankruptcy, which can affect your credit rating and further lower your chances of getting a loan. If you’ve struggled to pay off an overdue bill for an extended period, considering a settlement should be your final option. You can settle the amount in one lump sum or explore a workout agreement to manage the payment.

However, below are some benefits of credit card settlement that you cannot ignore:

It can save you money.
Paying a lump sum or setting up a workout agreement with the bank can help you get out of debt faster.
You’ll no longer have to deal with calls from the bank asking you to settle your payments.

Does Credit Card Settlement Affect Your Credit Rating?

Opting for credit card settlement may offer relief to those struggling with overwhelming debt, but it can seriously harm your credit score. Let’s explore its implications:

Immediate Impact

Settling a credit card debt can lead to a sharp decline in your CIBIL score. Since the entire amount owed isn’t repaid, it leaves a negative mark on your credit record.
Long-Term Effects

The drop in your CIBIL score can have enduring repercussions, making it more difficult to secure credit in the future. Lenders might perceive you as a higher risk, whether you’re applying for a new credit card or a loan.
Recovery Time

Restoring your credit score after a settlement can take years of disciplined financial behaviour, including timely payments and careful management of your credit.

Conclusion

In conclusion, going for a credit card settlement is not the best option and should only be kept as a last resort if no other options are left for you. To avoid falling prey to credit card settlement, it’s wiser to get a credit card that has multiple uses so that you don’t have to get a credit card for different purposes, like shopping, dining, or travelling. Here’s where Jupiter can help.