Credit card debt is both daunting and expensive, and it’s no wonder more Americans are looking at how to negotiate credit card debt settlement. While the Federal Reserve Bank of New York’s Household Debt and Credit Report for Q1 in 2024 shows that credit card balances dropped by $14 billion to $1.12 trillion, history shows these figures will likely rise again as the year progresses.

Settling your credit card debt involves negotiations with credit card companies, either on your own or with the help of an attorney, debt counselor or debt settlement company. Before starting the credit card settlement negotiation process, you’ll want to prepare well and follow some post-settlement steps to get the most out of the process.

What is a credit card debt settlement?

Credit card debt settlement, also called debt relief or debt adjustment, is a process in which a lender lets you pay off your credit card for less than your outstanding balance.

Creditors may agree to this when their customers experience financial hardship — especially when the debt might not get paid otherwise.

Pros and cons of negotiating credit card debt

While credit card settlement sounds like an option to ensure you get out of debt, it comes with a caveat. Your credit score will dip further when your credit report shows that the account is settled rather than closed.

However, this approach may help individuals who ace financial hardship or cannot make their payments. It can also prevent you from going deeper into debt by continually accruing interest or penalties for defaulting.

How to settle credit card debt

You have several options available when settling your credit card debt. You can do it yourself, enlist the services of a reputable third-party debt settlement firm, file for bankruptcy, consider credit card hardship programs or sign up for a debt management plan.

DIY credit card settlement

Your first option is to negotiate with your credit card company directly. Contact your card issuer’s customer service line and ask about the possibility of debt settlement. While the process is similar across issuers, the specifics will differ based on the lender. Here are some examples from different lenders:

• Capital One: Call the Capital One personal credit card service line at 1-800-227-4825 to start the settlement process.
• Citi: Call Citi’s customer service line at 1-800-347-4934 for help with your current credit card debt.
• Synchrony Bank: Find your credit card partner from the Synchrony Bank contact webpage, then log in to your account. You’ll be redirected to the card partner’s website to chat with a customer service agent.

The percentage credit card companies will accept in a settlement depends on your outstanding card balance, your financial situation and the lender’s assessment of how financially beneficial the settlement might be. Generally, the less likely they think you will pay off your debt, the more likely they are to accept a settlement.

Third-party debt settlement

If you’re considering seeking help from a third-party provider to tackle your debt, tread carefully.

While these services can help start the settlement process, do your homework to avoid scams. Contact your state attorney general’s office and local consumer protection agency to identify reputable and reliable debt settlement companies.

Many debt settlement services operate on a for-profit basis, meaning they charge a fee for their assistance. This additional cost can further strain your already tight finances.

Additionally, these companies often employ a long-term savings approach, requiring you to deposit a fixed amount into an escrow account monthly, sometimes spanning 24 to 36 months — a long time when you’re grappling with debt. These payments are used to offer a lump sum to settle debt.

Note that with DIY debt settlement and debt settlement with a company, you may run out of time to negotiate a settlement with the original creditor if your debt is sold to a collections agency.

Debt management plan

A debt management plan involves reviewing your income and expenses with a debt counselor to create a financial plan to pay your debt. This only applies to credit cards and other unsecured debt.

Debt counseling agencies can negotiate lower interest rates and fees but don’t negotiate a lower settlement amount. While working through a debt management plan, you may find it hard to apply for more credit, similar to the effects of debt settlement and bankrupcy.

Bankruptcy

There are two types of bankruptcy to consider, and both options will remain on your credit report for at least seven years.

• Chapter 7: This type of bankruptcy is also called a liquidation or straight bankruptcy and involves selling off your assets, paying your creditors with the proceeds and getting the rest of your debt written off or discharged.
• Chapter 13: This type of bankruptcy follows a strict three- to five-year settlement payment arrangement structured by a bankruptcy attorney. You get to keep your assets with this bankruptcy type.

Not all debt gets settled during bankruptcy, including child support and taxes.

Credit card hardship programs

Many lenders offer credit card hardship programs to their customers. This might include a temporary reduction in interest rates and protection from collections for the duration of the program.

Cardholders need to prove financial hardship and agree to the lender’s terms to qualify. This process usually lasts six to 12 months.

Alternative ways to manage credit card debt

If you want to streamline your payments and have a decent credit score, consider debt consolidation or a debt balance transfer:

• Balance transfer credit cards: If you’re stuck with high credit interest rates, a 0 percent interest rate balance transfer credit card might simplify your cash flow for a period. Be sure you can settle the debt before the interest-free period window ends.
• Debt consolidation loans: With debt consolidation, you transfer multiple smaller debts into one larger loan. These often result in lower payments with lower interest rates. However, you may extend the term on your loans, which may mean you pay more interest in the long run but have lower payments and more breathing room in your budget.

How to prepare to settle credit card debt

Before initiating negotiations with creditors, assess your current financial situation. Determine your total outstanding debt, evaluate your ability to make payments and establish realistic goals for debt settlement discussions.

Additionally, familiarize yourself with your rights under the Fair Debt Collection Practices Act (FDCPA) to protect yourself from unfair practices during the negotiation process.

Once you’re fully informed, you can follow these steps to negotiate your credit card debt with your creditors:

1. Collect all relevant documents, including your current debt balance, credit card statements, payment history and any correspondence with creditors.
2. Determine the maximum amount you can afford to offer as a lump-sum payment and prepare to negotiate from there. Provide proof of income and details of your ongoing expenses to illustrate that you won’t be able to pay your debt in full as agreed.
3. Contact your creditors or collection agencies to express your willingness to settle the debt. Remain calm, polite and persistent during negotiations.
4. Once you reach an agreement, ensure all terms are clearly outlined in writing before making any payments.
5. Make the agreed-upon payment promptly and retain documentation of the settlement for your records.

How to rebuild your credit after a settlement

While settling credit card debt can provide immediate relief, it will reflect negatively on your credit report and possibly result in a credit score drop. You can try a few strategies can rebuild your credit:

• Pay bills on time: Put together a budget so that you have enough set aside to pay all your bills. Ensure timely payments to demonstrate responsible financial behavior.
• Use credit wisely: Limit new credit applications and maintain low credit card balances to improve your credit utilization ratio — the proportion of your total available credit card limits you’re currently using.
• Monitor your credit report: Regularly review your credit report for inaccuracies and take steps to correct errors promptly. A credit repair company may be able to help with this step.
• Consider secured credit cards: Secured credit cards are easier to qualify for with poor credit as they require a cash deposit as collateral. Using them responsibly can help you work toward qualifying for standard credit cards.

The bottom line

Once you understand your options, you can decide if settling your credit card debt is the right step for your finances. You can also speak to a financial advisor or registered debt counselor to walk you through the process.