It sounds like you're considering the "nuclear option" for managing your credit card debt. In a word, don't.

It's tempting to bury your head in the sand and hope that your money troubles go away. However, there's no telling how a particular bank will react to your situation. The best thing you can do if you know you're not going to be able to pay your bills is to communicate with your lenders.

Every credit card issuer runs some kind of hardship program for cardholders in your situation. Some are more generous than others, and every bank will change their offer depending on your customer history, your projected income, and a host of other factors.

In a best case scenario, your lender can qualify you for a kind of balance transfer offer that will require you to close your existing account. In exchange, you'll get an extended period to pay down your debt at a very low APR, but with no charging privileges. That means your monthly minimum payment could end up a fraction of what you're paying now.

A few things will happen while you're on this type of program:

  • Other credit card issuers may scale back your credit limits.
  • Your credit score will drop, since your hardship account will report either as being closed or at 100 percent utilization.
  • You won't qualify for most instant approval credit card offers.

However, these effects are small change compared to the impact of your account racking up multiple missed payment or going into delinquent status.

You've also probably heard stories about credit card companies willing to settle out accounts for a fraction of the balance due. This happens, but it's rare. More to the point, it usually happens only at the very final moment before your bank decides to sell the right to collect on your account to a third party debt buyer. By this time, the damage to your personal credit will overwhelm any perceived savings you achieve by paying out a smaller lump sum.

Requesting a hardship extension from your credit card company sounds embarrassing, but don't worry. Most banks train special customer service teams to offer compassion and empathy when you call. If yours doesn't, at least the call will be short. Either way, it's far better to make arrangements with your credit card issuer now than to take your chances on third party debt buyers who may use aggressive collection tactics or even lawsuits to more of your money than you currently owe.

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