Think twice before you “settle” your credit card accounts
While debt-ridden consumers are getting loads of advice on how to negotiate with banks to pay off or eliminate credit card debt, the full impact of that decision is often lost in the hoopla. As some financial experts have begun to explain more fully, any “deals” to settle debt comes with a price – one that could negatively impact your credit score and future borrowing power for years to come.
Financial analyst Stacey Bradford points out that these negotiations end up with a “charge-off” on your credit report, a neon-like flashing warning sign that you are now a financial risk.
“Once creditors see the ‘charge-off’ on your credit report, warning bells will ring and they will likely raise the interest rate on any additional cards you hold. So now your other balances will be tougher to pay off,” Bradford writes.
The “charge-off” could also lead to another reaction from your credit card issuers, according to Adam Levin, chairman of Credit.com. Banks could lower your credit limit on other cards or close accounts entirely, giving your credit score a bigger hit while limiting your available credit balance.
Don’t forget also that forgiven debt is income, according to the IRS, and has to be claimed as such.
The bottom line: Contact your lender and seek ways to resolving the crisis without closing the card. Supervisors could help lower interest rate, or set up a temporary payment schedule that will keep you in good standing until you can better pay off the balance of your debt.
