How to Settle Credit Card Debt [The Top 3 Ways]

High credit card debt makes it difficult to manage your finances. Gain peace of mind by learning how to settle credit card debt today.
Infographic of someone on a scale trying to settle credit card debt

Credit cards are a useful tool for building credit and getting cash back on everyday purchases. If your balance is growing steadily, however, you may find it difficult to make your monthly payments. Fortunately, it’s possible to settle your accounts and reduce stress related to your finances. Keep reading to learn how to settle credit card debt and improve your overall financial circumstances.

Negotiate with Creditors

One of the best ways to settle credit card debt is to negotiate a settlement with your bank or credit union. No one knows more about your finances than you, so talking directly to your credit card issuer can help you get a settlement with favorable terms. If you’re worried about asking for a settlement, don’t be. Credit cards are unsecured, meaning they aren’t backed by any assets. Credit card issuers can’t take your assets away and sell them to recoup their money, so they’re more likely than other types of lenders to work with you.

Types of Settlements

Before you attempt to negotiate a settlement, you should know what types of settlements are available. Credit card companies typically offer lump-sum settlements, hardship agreements and workout agreements. A lump-sum settlement is exactly what it sounds like. You offer to pay the credit card company a lump sum that’s lower than your current balance. For example, if you owe $1,000, you might offer to settle the debt for a lump-sum payment of $600. This saves you money and gets the debt paid off much faster.

Hardship agreements are designed to give you a temporary reprieve while you’re dealing with a financial setback. If you lose your job suddenly or have a medical emergency, you may be able to negotiate a lower interest rate, lower monthly payments or lower fees. Your credit card company may even allow you to miss a few payments to give you a chance to get back on firmer financial footing.

A workout agreement allows you to “work out” something with your credit card issuer. The company may be willing to reduce your monthly payments, waive late fees, lower your interest rate or take other steps to help you get your account back on track.

Working with Debt Settlement Companies

If you’re intimidated by the idea of contacting your creditors, a debt settlement firm can do the negotiating on your behalf. Debt settlement companies typically have you pay a fixed amount of money each month. Once enough money accumulates, someone from the company will contact one of your creditors and attempt to negotiate a settlement. If the creditor agrees, the debt settlement firm uses some of the money to satisfy your credit card debt.

Your debt settlement company may ask you to stop paying on your credit cards so that you have more money available to negotiate settlements. Be aware that stopping your payments can cause your credit score to drop, making it more difficult to qualify for new accounts in the near future.

Apply for a Personal Loan

Infographic of someone trying to settle credit card debt

For many people, lump-sum settlements are the most attractive, as they wipe out each debt completely. If you want to negotiate a lump-sum settlement, however, you need to have some cash on hand to pay the settlements. One way to get the money you need is to apply for a personal loan. If your score is high enough, you may qualify for a loan with low monthly payments or a lower interest rate than you’re currently paying on your credit cards. You can use the loan funds to settle your credit card accounts. 

Just be sure you’ll have enough money left over to make the monthly loan payments.

Transfer High-Interest Balances

High interest rates make it more difficult to pay off your debt, especially if you only make the minimum payment each month. Here’s an example. If you have a credit card balance of $2,000 with a 9.99% interest rate and a minimum monthly payment of $40, you’ll pay $573 in interest by the time you pay off the card. If the interest rate increases to 19.99%, you’ll pay $2,098 in interest—nearly four times as much.

One way to overcome high interest rates is to transfer some of your balances. If your score is high enough to qualify for a card with a 0% introductory offer, you may be able to transfer a high-interest balance with a card that has no interest for 12 months or more. During the promotional period, you won’t have to worry about interest continuing to accumulate. If the card still has a balance at the end of the promotional period, you’ll pay interest on that balance.

Additional Tips for Getting Your Finances in Order

Once you settle your credit card debt, you may want to take additional steps to improve your finances. Here are just a few things you can do to reduce the amount of debt you have and lower some of your expenses.

Pay Off Unpaid Tax Debt

If you’re behind on your federal or state taxes, come up with a plan to pay them off as soon as possible. State tax agencies have different rules regarding interest and penalties, but interest on federal tax debt compounds daily. The longer you wait to pay off your balance, the more interest you’ll end up paying.

If you feel comfortable negotiating with the IRS on your own, call to set up an installment agreement. An installment agreement allows you to pay back the tax debt over time. It can also prevent the IRS from garnishing your wages or seizing your property. The amount due each month depends on your total tax balance.

You may also want to consult with an attorney to see if you qualify for an offer in compromise (OIC). This is a type of settlement designed specifically for federal tax debt. The IRS considers several factors when determining if an applicant qualifies for an OIC, including their income, expenses and ability to repay the amount due. A tax attorney can help you navigate the process of applying for an OIC and complying with IRS requirements.

Switch Car Insurance Companies

Just because your insurance company offered the best rate when you purchased your policy doesn’t mean it’s giving you the best rate now. Insurance companies often charge low rates at the beginning of your relationship to convince you to buy coverage. When it’s time to renew, your premium may increase drastically. Shop around before your policy renews to see if another company can give you a better deal. You’ll end up with more money available to settle your debts.

Reduce Your Expenses

While you work to pay off debt, work to reduce your expenses as much as possible. Depending on your current financial situation, you may be able to save money by canceling some of your streaming services, using less expensive ingredients to prepare meals or eating out less often.

Get Credit Card Debt Relief 

Credit cards provide a number of financial benefits. However, they can also quickly become an escalating ball of debt and interest rates. If you find yourself unable to make your monthly payments, you may consider negotiating with your creditor and trying to work out a type of settlement. If that doesn’t work, it may be time to consider a personal loan or find more creative ways to reduce your expenses. 

You might also be interested in: 10 Tips To Improve Your Credit Score Today

Similar Information

Man sitting at his desk with paperwork

Estate Planning Essentials

Estate planning is a critical process, but one that no one wants to talk about. Planning for your assets to be managed and distributed according