Is credit card debt forgiveness the best option for you? 5 ways to decide
It might be easier than you expect for credit card debt to sneak up on you. Not only do the interest charges cause any card balance you carry to grow rapidly, but in today's elevated rate environment, credit card rates are now above 21% on average. With rates that high, even the most financially responsible cardholders are at risk of falling into a cycle of mounting debt. After all, it only takes a few unexpected expenses, a temporary loss of income or a period of overspending to end up with card debt that's difficult to manage.
But if you're facing this issue, there are potential solutions to consider. For example, credit card debt forgiveness, also known as debt settlement, may offer a potential reprieve. With credit card debt forgiveness, either you or a debt relief company you work with negotiates with your creditors to try and settle your debt for less than what you owe. If the creditor accepts the settlement offer, they'll forgive the remaining amount.
While credit card debt forgiveness can provide relief to some cardholders, though, it isn't suitable for everyone. Below, we'll break down how to determine whether it's right for you.
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5 ways to decide if credit card debt forgiveness is best for you
To decide if credit card debt forgiveness is the right choice for you compared to other debt relief options, it can help to weigh the following:
Compare the total cost to your other options
Calculate the total amount you'd pay under a debt settlement plan versus other options, like debt consolidation or debt management. Be sure to include all fees, interest and potential tax implications in the equation.
For debt settlement, estimate the settled amount (usually 50% to 80% of the original debt) plus the potential fees charged by the debt relief company. For other options, calculate total payments, including interest over the life of the plan.
If debt settlement results in significantly lower total costs, it may be worth considering. However, if the difference is minimal, the credit score impact and risks associated with debt settlement might outweigh the benefits.
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Assess your ability to make payments
You should also evaluate your current financial situation and ability to make consistent payments under different debt relief options. For example, debt consolidation and debt management plans typically require regular monthly payments. If you can reliably make these payments, these options may be preferable as they have less negative impact on your credit.
If you're struggling to make any payments at all, debt settlement might be more feasible. With this option, you save for a lump sum payment, which can be easier if you're facing severe financial hardship.
Consider the timeline
It also makes sense to compare how long it would take to become debt-free under each option. Debt management plans and consolidation loans usually have fixed repayment terms, often three to five years. Debt settlement can potentially resolve your debt more quickly, sometimes in two to four years.
If you need to resolve your debt situation rapidly (for example, if you're planning a major life change or financial move), the shorter timeline of debt settlement might be advantageous. However, if you can manage a longer repayment period, other options may be preferable.
Weigh the impact on your credit score
Most debt relief options will likely affect your credit but to varying degrees. Debt consolidation and management plans may have a minor, often temporary impact on your credit score. In contrast, debt settlement can significantly damage your credit for up to seven years.
If maintaining a good credit score is crucial for your near-future plans, consider options other than debt settlement. However, if your credit is already poor due to missed payments, the additional impact of debt settlement might be worth the potential savings.
Evaluate your risk tolerance
It can also help to assess the risks associated with each option. Debt consolidation and management plans are generally low-risk once established. You make regular payments, and your debt is gradually paid off. Debt settlement carries more risk. There's no guarantee creditors will agree to settle, and you typically need to default on your payments to be eligible.
If you're risk-averse and can manage structured payments, other options may be more suitable. But if you're willing to accept higher risk for the potential of greater savings, debt settlement could be worth considering.
The bottom line
Credit card debt can be hard to dig yourself out of, but if you're struggling to pay off what you owe, there are lots of options to consider. Debt forgiveness is one of them, and you can start to determine whether it's the right solution for you by weighing the factors above. But remember that debt forgiveness is not the only option. There is a wide range of solutions worth considering, so if you find that debt forgiveness isn't the right path, one of the other options could make more sense.
