Credit card debt can leave you feeling overwhelmed and helpless, especially when your phone doesn’t stop ringing with creditors. In some cases, they may offer you a settlement where you only pay a portion of the sum owing. This can be a huge relief but there are a few disadvantages to going this route.
For the purpose of this article, we’re going to look at both the pros and cons of settling the debt on your credit card.
Reduce your debt
Without a doubt, one of the biggest advantages to settling your debt is it reduces the total sum you owe. This is a huge plus as you’ll have more money to pay toward your credit card. And you’ll avoid the late fees, interest and any penalties, which can often add up to a hefty amount. Probably the biggest advantage is peace of mind, knowing the constant phone calls from creditors will stop.
Your credit score will be affected
Having the creditor write off the debt isn’t as easy it sounds. Setting your card debt has a negative impact on your report for seven years unless the company agrees to list your debt as paid. This rarely happens, but it still beats having a record of missed payments.
The IRS pays attention
By settling your credit card, there’s a chance it can have a negative impact at tax time, especially if it’s over $600. To avoid this, the collection agency or credit card company should send you a 1099 form. You need to add the amount that was written off to your income and pay taxes on it as if it was money warned.
The pros definitely outweigh the cons and it’s something you should consider if you feel like you’re drowning in credit card debt.