What is Credit Card Settlement and How Does it Work !

Credit cards are a convenient way to manage expenses, offering flexibility to cover immediate costs and repay them over time. However, unexpected circumstances can sometimes make it challenging to keep up with payments, leading to financial strain. In such cases, credit card settlement may be an option to consider. This process involves negotiating with the card issuer to pay a reduced, one-time settlement amount, allowing you to clear the debt for less than the total outstanding balance.

In this article, we'll learn more about credit card settlement in India, its impact on your credit score, and alternatives to settlement.

What Is Credit Card Settlement?

Credit card settlement is a financial strategy used by individuals struggling to manage their credit card debt. It involves negotiating with creditors to reduce the total amount owed. When cardholders are unable to keep up with payments, they may choose debt settlement, either by working directly with creditors or through a debt settlement company.

Typically, the process involves halting regular payments to creditors, allowing the cardholder to accumulate funds in a dedicated savings account. Once a sufficient amount is saved, the debtor (or the debt settlement company) contacts creditors to propose a lump-sum payment that is less than the full balance owed. If accepted, the creditor forgives the remaining balance.

While this method can provide significant relief by reducing overall debt, it can also negatively impact credit scores, as settled accounts are marked as “settled” rather than “paid in full.” Therefore, individuals considering debt settlement should weigh its potential benefits against long-term consequences on their creditworthiness.

Credit Card Debt Settlement Process

The credit card settlement process typically involves the following steps:

1. Assess Debt: Review your total credit card debt and overall financial situation.
2. Cease Payments: Temporarily halt regular payments to start accumulating funds.
3. Explore Settlement Options: Decide between negotiating directly with creditors or working with a debt settlement company.
4. Build Savings: Set aside funds in a dedicated account to offer as a lump-sum settlement.
5. Negotiate with Creditors: Propose a reduced settlement amount to your creditors.
6. Reach Agreement: If creditors accept, formalise the settlement agreement.
7. Make Payment: Pay the agreed-upon amount and obtain confirmation of debt forgiveness.
8. Monitor Credit Report: Check your credit report to ensure settled accounts are updated accurately.

Impact of Credit Card Settlement on Credit Score

Settling credit card debt for less than the full amount owed can significantly impact your credit score. When you settle a debt, the account is marked as “settled” rather than “paid in full,” signalling to lenders that you did not meet the original repayment terms. This notation can lower your score, as it reflects an incomplete repayment. Additionally, halting payments prior to settlement can further affect your payment history, leading to a cumulative reduction in your credit score. While settling debt offers immediate financial relief, it's essential to weigh the long-term effects on creditworthiness, as it may hinder future borrowing opportunities.

Credit Card Settlement: Should You Opt for It?

Opting for credit card debt settlement can be beneficial for those burdened by debt and unable to make payments. However, it has notable drawbacks, including a negative impact on your credit score and potential tax implications on forgiven debt. Before deciding, explore alternatives like debt management plans or credit counselling. Carefully assess your financial situation and weigh the long-term consequences against the immediate relief debt settlement can provide. One of the crucial credit card debt settlement tips is consulting a financial advisor who can help you make an informed choice.

Alternatives to Credit Card Debt Settlement

Before considering how to settle credit card debt, there are several effective alternatives you can explore to manage or reduce debt.

You can opt for a Debt Management Plan (DMP) through a credit counselling agency. Counsellors can negotiate lower interest rates with creditors, making monthly payments more manageable.

Another approach is debt consolidation, which combines multiple debts into a single loan with a lower interest rate, simplifying repayments and potentially reducing overall interest costs. Credit counselling can also provide valuable guidance and strategies for budgeting and improving financial literacy.

Additionally, balance transfer credit cards allow you to transfer high-interest balances to a card with a lower rate, which can help save on interest.

Another alternative is using a personal loan to pay off credit card debt, which can streamline repayments and potentially lower the interest rate.

Each option has its own pros and cons, so careful consideration is essential

Simplify Debt Management With SMFG India Credit

A personal loan can be an effective way to manage credit card debt by consolidating high-interest balances into a single, lower-interest personal loan. This approach can reduce monthly payments and overall interest costs, making debt more manageable.

SMFG India Credit offers personal loans for debt consolidation up to INR 30 lakhs* and interest rates starting from 13%* per annum. You can apply online or reach out to us for personalised assistance.