Indebtedness is something many Americans are familiar with. Repaying credit card debt can be a challenge when financial pressures persist. Job loss is a common cause of financial difficulty that can lead to delinquency. Falling behind on payments intensifies the problem as fees and interest hit accounts. More Americans are facing this challenge, with the Federal Reserve Bank of New York reporting roughly 10% of people with credit card debt being 90+ days delinquent on payments. Delinquent credit card debt can be problematic, but not impossible to overcome. Here’s when it makes sense to settle the debt and create a clear path to freedom.
What is delinquent credit card debt?
Credit card delinquency occurs when you miss a payment. In theory, your credit card is considered delinquent once it is overdue. In practice, though, most credit card companies don’t report a delinquent account until payment is at least 30 days past due, or missing two monthly payments.
This is not the same as errantly paying late. Payments that are several days late typically only result in a potential late fee plus possible interest. Paying at least the minimum amount due is crucial to avoid having your account considered delinquent. Assuming your payment is received within several days of the due date, there may be little lingering long-term damage.
How credit card delinquency works
An account becomes delinquent due to missing payments. Once an account is delinquent for 60 days, the creditor commonly reports missed payments to the credit bureau, which can significantly impact your credit. The credit bureau maintains records of delinquency, and negative information can remain on your credit report for up to seven years. It’s also fair to expect being hit with a penalty APR at this point, which is typically around 29.99%.
Hitting the 90-day mark may result in your account being charged off or sent to collections. Depending on the creditor, you may receive calls from collectors, or your account may incur additional late fees, and, after prolonged delinquency, face account closure by the credit card company.
Creditors want repayment, but the best way to handle it depends on your particular circumstances.
When does it make sense to settle your credit card debt?
There’s rarely a one-size-fits-all approach to managing credit card delinquency. Due diligence is necessary to find the right fit for your situation. “It is never an ideal situation, but there are times when it makes sense to settle credit card debt. In general you only want to do it if you have exhausted all other options including debt consolidation, repayment plans and balance transfers,” says Bobbi Rebell, CFP® and consumer finance expert at CardRates.com.
Instances when it makes sense to consider settling credit card debt include:
You can’t make minimum payments: For people dealing with severe financial hardship and unable to make minimum payments, it may make sense to settle. If you are having trouble paying your credit card bills, settlement may be an option to consider.
After making only the minimum payment, be aware that this can prolong your debt and may not resolve delinquency. Relying on only the minimum payment keeps debt growing and can make it harder to get out of delinquency.
To avoid bankruptcy: Settling undoubtedly negatively impacts credit scores, but bankruptcy does more so. Pursuing a settlement option may make recovering your credit simpler.
If you have a lump sum: Creditors want the cash they’re due. If you’re trying to learn how to pay off delinquent credit card debt, you may be in a good position if you have a lump sum of cash. This gives you more leverage that could influence the creditor to negotiate.
When you’re responsible for the debt: There’s often little sense in contesting debt if you know you’re liable for it. Settling may let you sidestep costly legal fees tied to a court case.
Each situation is typically unique. It pays to research your options and work with the creditor to find a solution that works for both parties. Negotiating a payment plan or a structured repayment plan with your creditor can sometimes help you avoid settlement and manage your debt more effectively. “Settling high-interest debt can be overwhelming and cause significant stress on consumers and their relationships. It’s important that indebted consumers understand they are not alone and that there are options to settle the debt quickly and effectively,” says Leslie H. Tayne, Esq., finance and debt expert and founder of Tayne Law Group.
How to improve credit score after delinquency
Settling credit card debt can have ruinous effects on your credit score. And, it will take time to recover from the hit. Thankfully, there are ways to improve your credit after settlement.
Opening a new credit card may seem wise, as you will receive new offers after the settlement. “Many credit card offers will come after you resolve your debt, so ensure you’re making smart decisions about what you can handle financially,” notes Tayne. Ignoring such advice can put you in peril if you’ve not dealt with the main cause of the spending. You might also consider a secured credit card as a practical tool to rebuild your credit after delinquency.
Practicing wise credit habits is another good way to lift your credit after settlement. Establishing a positive payment history and making on-time payments are crucial for rebuilding your credit profile. Timely payments are the largest single component of a credit score. Avoid missing payments and work on your credit utilization ratio. Responsible credit card usage, such as keeping balances low and paying on time, can help improve your credit history.
Thankfully, recovery can begin relatively quickly. “If you are proactive about staying on top of your bills and monitoring your credit, you could start to see improvement as soon as six months to a year,” says Rebell. She notes that settlements will stay on your credit report for up to seven years and that it’s fair to expect to reach a healthy credit score within several years.
Potential risks of delinquent credit card settlement
Unfortunately, settling delinquent credit card debt isn’t without risk. Failing to account for associated risks can be costly when managing indebtedness.
Credit card issuers aren’t required to work with customers. Worse yet, not all companies that market themselves as able to negotiate for you will be reputable. Prudent examination is essential to identifying a company that can truly help. “There are state licensing requirements for debt settlements in many states, so do your research and find a legitimate professional. Look out for red flags such as too many promises, solicitation, and requiring money up front,” says Tayne.
Understandably, you risk achieving goals in the near term after settling. Creditors will view you as an increased risk. “You also may have trouble getting loans in the future because lending institutions may see you as a high-risk borrower. That could make it harder to get approved for everything from mortgages and car loans to credit cards and rentals,” notes Rebell. Delinquency can also result in higher interest rates, making it more expensive to borrow money. Other factors, such as payment history and credit utilization, also play a role in lending decisions.
Settling undoubtedly can negatively impact credit scores, but bankruptcy does more so. Both options can harm your ability to borrow money or secure favorable interest rates.
Finally, you may face taxable consequences if the amount forgiven is over $600. The IRS requires amounts over that to be reported.
Alternatives to credit card debt settlement
Settling delinquent credit card debt won’t work for everyone. Other options may work better for some individuals. These are some of the top alternatives to debt settlement.
Balance transfers: A balance transfer card can be a good alternative to settlement, but only in the right circumstances. If your credit is still relatively healthy and you’re not too far behind on payments, this can be a good solution if you’re committed to eliminating overspending.
Negotiate on your own: This is another good option if you’re not too far behind. The creditor may be willing to lower your interest rate for a set period or establish another arrangement. Keep in mind the creditor isn’t obligated to negotiate.
Hardship plan: Some issuing banks offer credit card hardship programs for people facing dire circumstances. Such programs reduce rates or suspend fees for a short time. Programs aren’t usually publicly marketed, so it’s best to contact the creditor. Many lenders may offer hardship programs or work with you to create a debt management plan that results in lower payments.
Debt consolidation: Debt consolidation vs. debt settlement often comes down to how far behind you are on payments. Consolidation is an option if your credit is in fair shape and can simplify repayment, as it puts all debts into one loan. Working with a credit counseling agency or a certified credit counselor can help you review your financial situation and develop a debt management plan.
A nonprofit credit counselor can help you negotiate with creditors to establish a manageable monthly payment and provide guidance on debt management.
The bottom line
Battling credit card debt delinquency isn’t for the faint of heart. It may pay to settle, but it’s vital to consider all points before making a decision. Fortunately, there are resources available to help you wisely tackle the situation. Pair that with a commitment to practicing prudent financial habits, and recovery is possible.
