How Does Credit Card Settlement Work?

Credit card settlement is essentially a situation whereby the credit card company will be willing to accept less payment than what is owed to the credit card company, especially when the person holding the card is facing difficulties repaying the full amount owed. One major distinction between the repayment and the settlement is that in the former case, all the debts are repaid, whereas in the latter, the debts are repaid partially. It is important that you know how to settle credit card debt so that you can find out whether you should settle your credit card debt or not. This is what this blog is trying to tell you. 

Key Takeaways

• Credit card settlement requires less payment than the entire outstanding balance.
• Settlement may be used in cases where full payment becomes hard.
• There is no need for lenders to accept settlement proposals.
• Settled balances can have an adverse impact on future credit.
• Full payment is always better if possible financially.

What Is Credit Card Settlement?

The concept of credit card settlement involves an agreement made between the cardholder and the bank wherein the bank accepts an amount less than the amount due from the customer. Such agreements are normally made when the cardholder is going through tough times financially and is unable to repay the entire debt amount. Once the agreement is made and the required amount is paid, the account gets settled. But it should be noted that credit card settlement has an adverse effect on your credit score. When you understand about the credit card bill settlement, then it can help you assess the implications before agreeing to such an arrangement. 

How Does the Process of Credit Card Settlement Take Place?

Credit card settlement usually takes place as follows:

1. Evaluate Your Financial Condition

Before meeting the credit card issuer, you need to analyse your total balance, income, expenses, and other factors. The situation where the entire balance cannot be repaid is normally what is relevant for settlement.

Additionally, one needs to see whether he/she will be able to manage the debt without using this approach.

2. Contact the Credit Card Company

You need to contact the bank or credit card company and discuss your difficulties with them. They may require you to provide proof of your inability to pay the full amount.

One cannot assume that it is mandatory for the bank to accept this request for settlement.

3. Talk About the Settlement Amount

In case the issuer agrees to a settlement process, they may give an amount that you have to pay for the settlement of the account.

The settlement amount is not determined through a fixed percentage. There can be different amounts depending on the outstanding balance, account status, repayment history, finances and internal policy of the creditor.

4. Get the Settlement Agreement in Writing

Before paying anything, it is important that you get the settlement agreement in writing. This agreement will detail the settlement amount, payment deadline and the terms of the payment.

The importance of having these papers in your possession is that it serves as proof of the payment made.

When Should Credit Card Settlement Be Considered?

Credit card settlement should be considered in cases where it is not practical to pay back the entire amount even after making efforts.

Such conditions that can lead to problems paying back could include:

• Job loss or drop in income
• Unforeseen medical or personal expenses
• Losses at the business
• Building up several unsecured debts
• A long financial crisis

Credit card settlement should usually not be viewed as an easy way to get a discount on credit card payments. Paying back the total sum will probably be more beneficial if it is possible.

What Are the Benefits of Credit Card Settlements?

Settlements may help ease things for someone who is unable to pay back the total debt amount.

1. Reduced Payment Requirement

The agreed-upon settlement amount is sometimes less than the total amount owed. This helps in making fewer payment arrangements by the borrower.

2. Resolution of Debt Amount

After paying the total settlement amount according to the terms, the debt amount may be settled.

3. Other Way Out for Struggling Borrowers

For those borrowers who find themselves in severe financial difficulty repaying the total amount, settlements offer another way out, provided the lender agrees.

What are the disadvantages of Credit Card Settlement?

There are some significant disadvantages associated with settlement that need to be taken into consideration.

• Negative Credit History

It may be considered negative for potential lenders in the future, as it implies that the borrower failed to pay back the total amount he borrowed from the lender. TransUnion CIBIL states that lenders may view a 'settled' status as risky when evaluating future credit applications. 

• Getting Credit Would Be Difficult

A settled account may make it more difficult to obtain loans or credit cards in the future, depending on the lender's assessment and overall credit profile. 

• Settlement Is Different From Closure

Settling an account is not equal to the closure of an account, as you do not clear your total debt through this procedure.

• Potential Tax Issues

In some situations, there could be some tax liabilities arising out of the amount forgiven or waived. You would be advised to take appropriate tax advice in this situation.

What Is the Effect of Credit Card Settlement on CIBIL Score?

Credit card settlement can adversely impact your CIBIL Score and your credit history.

Where the creditor agrees to receive only a partial payment of the due debt, the loan status might show as 'settled' instead of 'closed'. As per CIBIL, creditors don’t look at 'settled' loans in the same light as those loans that have been paid off.

The effect of settlement on the CIBIL Score may differ from one individual to another. This is based on one’s previous credit history and other related details included in the credit report. In short, there is no fixed point deduction for your CIBIL Score post-settlement.

A borrower having settled their credit card loan must try to pay future dues on time and review their credit report periodically.

Settlement Versus Full Payment of Credit Card Account

Credit card settlement and full payment are two different things.

Full payment is when the borrower pays back what is owed as per the agreed-upon terms of the credit card account.

With full payment, the account may be reported as 'closed' by the issuer after the account status is updated with the credit information company. 

In the case of settlement, the credit card lender will accept only a portion of the amount owed in the settlement process.

The credit card account will thus remain settled, which can reflect poorly on the borrower.

Full payment is advisable for one who has the means to pay the total amount.

Settlement of Credit Card Debt versus Debt Consolidation

Debt consolidation and settlement of credit card debt deal with distinct problems.

Debt consolidation refers to the combining of various debts into one payment plan or loan depending on qualification and approval by the lender. The goal is usually to simplify the process of repayment.

Settlement refers to negotiating with the creditor to pay less than the total debt amount outstanding.

If you are able to repay your debt but find it hard to juggle with various payments, then consolidation might be worth considering. If you are unable to pay back the total debt amount outstanding, then settlement may be an option to consider as a final resort.

Points to Note Before Agreeing to Credit Card Settlements

Some of the factors that should be considered before accepting the agreement include:

• Determine how much debt you have.
• Find out whether it is feasible to fully repay or arrange for other repayments.
• Be aware of how the settlement will be reported to the credit information companies.
• Put the settlement terms in writing.
• Find out the exact amount that should be paid and its deadline.
• Save proof of payment and the settlement agreement.
• Check your credit report after the account is updated.
• Take into consideration the effect that it will have on future borrowing.

According to RBI guidelines, card issuers must follow a Board-approved procedure and intimate the cardholder before reporting a credit card default to a credit information company. If the customer settles the dues after being reported as a defaulter, the card issuer must update the status within 30 days of settlement. 

Conclusion

Credit card debt settlement helps individuals who are in difficult financial situations pay off their debts by negotiating with the credit card company. This, however, does not involve paying the debt in full and may negatively affect the individual's credit profile. 

Before opting for the debt settlement option, the individual should assess his/her ability to pay back the money fully or opt for another way of paying the debts. If how to settle credit card debt is the only option left, then documentation comes in handy. 

FAQs

1. Is it possible to cancel a credit card settlement after accepting it?

Yes, but only depending on the settlement terms reached with the issuer and whether the payment has already been made or not. You need to contact the issuer to discuss your plans to change or cancel the agreement.

2. Will the credit card settlement prevent recovery calls?

No, because the debt collection process might continue until the agreement is reached and confirmed by the creditor. Inquire with the creditor about changes in the repayment process.

3. Can an account that has been settled be modified?

Yes, a settled account may be updated to 'closed' if the borrower pays the remaining outstanding amount and the lender confirms the change with the credit information company. 

4. What should be confirmed prior to making the settlement payment?

Confirm the settlement terms provided by the creditor, the due date of the payment, the acceptable means of payment, and how the remainder of the dues will be settled.

5. Will there be an impact on your credit application with other lenders when you make a settlement with one?

Yes, a lender checking your credit score can take into account a settlement account while evaluating your creditworthiness. The significance of this is dependent upon the internal credit policies of the lender and the general state of your credit profile.

6. How will you restore your credit profile after settlement?

Making sure that you are paying all your credit bills on time and that your total debt level is not high will assist in building a healthier credit history.

7. Can interest/charges continue accruing while the negotiations on the settlement are taking place?

Interest and charges may continue to accrue during settlement negotiations, depending on the issuer's terms and the settlement arrangement. Confirm with the issuer how such charges will be treated in the settlement agreement. Inquire of the issuer how they are going to deal with the charges when drafting the agreement.

8. Is it possible to pay the settlement amount in instalments?

In some cases, this might be possible with the consent of the issuer. This should be outlined in the settlement agreement.

9. What if there are issues regarding timely payment of the settlement amount?

The settlement may become void due to non-payment within the specified period, which depends on the nature of the arrangement. It is advisable for the borrower to reach out to the issuer to find out if there are ways to revive the settlement agreement.

10. Is it possible to settle a credit card debt directly with the issuer?

It is possible for a credit card holder to reach out to the issuer directly in order to talk about the financial difficulties and discuss the possibility of settling the debt. In the case of a recovery agent, the cardholder needs to verify the authority of the agent first.