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Credit card debt settlement is one way to get out of serious debt. However, other options can have their own set of disadvantages.
Credit card debt settlement companies are for-profit businesses that offer to settle a consumer’s debt for less than what is owed. These companies typically charge startup fees and monthly fees.
Let’s discuss the pros and cons of credit card loan settlements.
What is a Credit Card Loan?
A credit card loan is a line of credit that allows you to borrow funds based on your existing credit limit and pay it back over a set repayment term. Credit card issuers offer this option to help you pay for large purchases or to fund unexpected expenses, such as medical bills.
Personal lines of credit are a form of loan where you can borrow money from a bank and repay it over time, with interest. This is usually used to finance large expenses or consolidate debt with companies like Symple Lending.
Negotiate with your credit card company to settle your debt at a lower amount than you owe. It may take several phone calls to negotiate, but this is a much better option than letting your account go into collection, which could hurt your credit rating and make it difficult to get new loans. If negotiating with a debtor, keep accurate records, including interest rates and penalties.
How do Credit Card Loans Work?
Credit card loans work differently than personal loans. They are revolving credit, which means that you can spend money and pay it back again and again, up to your limit. On the other hand, personal loans provide a lump sum of money you must repay in monthly payments. Both types of credit can help finance everyday expenses and pay off debt, but each style has its benefits and drawbacks.
For example, credit cards often come with a grace period, during which interest is not charged on new purchases. However, credit card companies charge interest on existing balances once that grace period ends. Additionally, be aware that cash advances may incur fees the issuer charges if you use your credit card. While the price is typically less than 5%, it’s still an additional expense. Credit card loan settlements can help you avoid these extra fees and lower your debt faster.
What are the Benefits of Credit Card Loan Settlements?
Credit card debt settlement can help individuals get out of serious debt by reducing the amount they owe. However, it is not without its risks. For one, debt settlement can damage an individual’s credit score, making it difficult to obtain employment opportunities or loans in the future. In addition, debt settlement can be expensive and often requires individuals to set aside money in a savings account until a resolution is reached with the creditor.
Another alternative to debt settlement is debt consolidation, which involves taking out a new loan to pay off several existing loans and credit card balances. However, this option is only available to consumers who can prove they are in serious financial hardship. This means that you will likely have to show a significant decline in income over the past year before your creditors will consider a debt consolidation loan. It is also important to note that a debt settlement will remain on your credit report for seven years.
What are the Disadvantages of Credit Card Loan Settlements?
While credit card settlements can help individuals overcome significant debt, they are not without disadvantages. For one, they can significantly damage an individual’s credit score. In addition, the process can take years to complete. Furthermore, debt settlements can be expensive, so it is best that you talk to an expert like those at Symple Lending.
During the credit card settlement process, individuals stop paying their bills and transfer the money they would have paid to their creditors into a savings account that a debt settlement agency manages. The debt settlement company then negotiates with the credit card companies to settle the debt for a lower amount.
Conclusion: Pros and Cons of Credit Card Loan Settlements
When a credit card issuer agrees to settle the debt, it usually writes off a portion of the outstanding balance. It considers the reduced payment made by the individual as full payment. The Internal Revenue Service (IRS) deems this forgiven debt as income, so individuals may be required to pay taxes on the settled amount. Also, credit cards with settled accounts stay on a person’s credit report for several years.
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