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Top Credit Question: How Can I Settle This Credit Card Debt?

Dear Credit Karma,

From, Alejandra

First off, it’s great that you are trying to figure out how to pay off your credit card balance beyond paying the minimum. Just to make it even clearer that you shouldn’t go back to just paying the minimum, if you did pay minimum (let’s say 3% the balance) on your $13,000 balance on a credit card with the average 14% APR, it would take you a whopping 18 years and 2 months to pay off your debt, and you’ll be paying an additional $8,091.21 in interest.

So, the big takeaway here for you and for readers as well is to always pay more than minimum. Even if you paid just $50 more each month, it would take you 3 years and 1 month and cost you $3,033.77 in interest—a dramatic difference.

Now that we’ve pinpointed what you’re doing right, let’s talk about solutions to your problem.

If your issuer agrees to settle your debt, it will be reported as “Paid-not as agreed” on your credit report and lower your credit score. FICO reports that debt settlement for a credit score around 780 can cost a painful 105-125 points off your score (the higher your credit score, the more damage you take with negative financial actions).

A word of warning: your issuer may not even agree to settle your outstanding debt. Issuers typically only consider settling debts that are “in default”—past due—more than at least 60 days. They are more willing to negotiate closer to the 180 day mark, which is right before issuers usually sell your debt to a debt collection agency for pennies on the dollar. Since you are still making minimum payments, your issuer may not settle for less than your total balance because you can still reasonably pay.

Fortunately, your good credit score qualifies you for other debt repayment options that won’t hurt your credit score:

1. Look into a balance transfer credit card, which allows you to pay down your existing debt at 0% interest for a period of time, saving you significant interest on a large balance like yours. But this might be your best bet because you have excellent credit to qualify for a premium card, like the Citi Platinum Select Mastercard which offers 0% intro APR for 18 months. Shop around for cards with low balance transfer fees, and make sure you don’t accrue more debt on your card as you pay it off.
2. Pay off your credit card with a loan. Loans at credit unions generally offer rates lower than big banks, and peer-to-peer lending, from Lending Club or Prosper, offer loans with lower interest than your current credit card’s APR, which saves you tons of money. Again, thank your great credit score for qualifying you for these great options.

Applying for a new credit card of loan will ding you a few points due to a hard inquiry, but ultimately, paying off your debt through these two options will make your credit score healthier. Plus, you are paying your balance in full, so there won’t be a black mark on your credit report. You can even test out both actions on your credit score with our free Credit Simulator.

Best of luck to Alejandra and readers out there also dealing with credit card debt.

Similar Posts:

• Is A Balance Transfer Card The Key To Conquering Your Debt?
• Getting A New Credit Card
• Why do you need to use a balance transfer credit card?
• Handling Your Credit Cards for Financial Success:
• Need To Know List: 5 Credit Card Changes & 5 Credit Card Warnings