ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

WARNING: Don't Settle That Credit Card Debt Just Yet! 4 Things You Need To Know Before Settling That Balance!

Updated on March 3, 2015

Introduction

In 2009, American consumers have over 850 BILLION dollars of credit card debt. The number would be a bit less in 2010, but there are constantly ads on TV that advertise that they can settle your credit card debt for only dimes on the dollar, reduce your debt by 50% especially if you have 10000 or more in credit card debt, and so on.

You may think that's a good deal... You don't have to do anything, except make a phone call, and you can pay a lot less in debt.

Here are a few things they won't tell you about their services...

Cut that Credit Card? Yes. Cut the Credit Card Debt? Not yet!
Cut that Credit Card? Yes. Cut the Credit Card Debt? Not yet!

You Can't Negotiate UNTIL You are Delinquent

What most people don't realize about debt settlement is you can't just call up a credit card company and say "I know I owe you 10000 but I only want to pay you 5000 and call it even." it doesn't work like that.

Instead, you have to stop paying for several months, ruin your credit first, THEN negotiate with the credit card company, and see how much it is willing to 'discount' the debt.

Some debt settlement companies offer to do all that for you... They will take your money (i.e. "Send us the payment instead"), ruin your credit for you, THEN negotiate on your behalf. Is that worth the time and the hit on your credit score?

Your Credit Score is Ruined

Any sort of "settlement" will be reported as a negative on your credit score, to the same extent as if the balanced was zero-ed due to "charge-off" (the credit card company didn't bother to collect any more) or "bankruptcy".

Furthermore, any of the delinquent payment history will remain in your credit file. Settling your debt won't erase that.

Finally, if you settled your debt recently your credit score can actually go even FURTHER DOWN, esp. if the charge-off occurred a while back. This is because the settlement 'event' is more recent, and recent events are worse on your score than events in the more distant past.

If you settled more than one credit card's debt you will have MULTIPLE RECENT NEGATIVES which will mean MAJOR hit on your credit score, almost as bad as having declared bankruptcy.

Your Credit Score Has Wider Effect

You may think that credit report and credit score is just between you and a credit card company, but that is quite far from the truth.

If you rent, your landlord can get a credit report on you.

If you work, your employer can get a credit report on you.

Thus, having a bad credit score can prevent you from renting, or even affect your employment application or subsequent promotions.

Not to mention you will have problems applying for any sort of credit, from store credit cards to car loans and even account for a cell phone.

Forgiveness of Debt Is Income

Even if you managed to survive the drop in credit score, there's one more item you need to be aware of... Taxes.

According to IRS, forgiveness of debt over $600 is considered income, and thus, you have to pay taxes on it!

If you owe $10000, and settled the debt for $5000, the forgiven amount, $5000, is considered income by the IRS, and thus, you have to pay taxes on it!

You may have settled the debt for a bit less, but did you budget for the taxes that you have to pay?

Conclusion

Before you settle your credit card debt, beware of the effects that settlement can have on you. The hit on your credit score precedes the settlement. The hit on your credit score is almost as bad as bankruptcy. The secondary effects on your credit hit is actually quite prevalent. And finally, you have to pay taxes on the amount forgiven.

If there are ways to solve the problem, such as credit counseling, use that first. Save debt settlement and bankruptcy as last resort.

Comments

    0 of 8192 characters used
    Post Comment

    • profile image

      Steve 

      6 years ago

      I liked this blog, but I think you may have mistaken creditor and debtor. May want to go back and edit.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)