How to Settle Credit Card Debt at a Discount

How to Settle Credit Card Debt at a Discount

Do you have credit card debt?

This is a huge problem for consumers. Since the financial crisis of 2008, unemployment has skyrocketed to almost 10%. Of course, this is just the "official" unemployment rate that's reported in the media. The true unemployment rate is much closer to 25% when you take into account those who are underemployed and those who are "discouraged workers" who have stopped looking for jobs. Because the unemployment rate is so high, many people just like you and me are struggling to pay their bills. This is why so many people are defaulting (not paying) on their credit card bills.

How did I get into this financial hole?

The simple truth of the matter is this - most people who are behind on their bills and owe more than they can afford to pay are in that situation because of denial and procrastination. You knew you should have stopped spending so much money on clothes and trinkets months ago, but you put it off. You knew you should get a budget for your family and keep to it, but you put it off. You knew you shouldn't take out that 2nd mortgage or buy new car, but you did it anyway because you were in denial about your financial situation.

It's ok. The first step to financial recovery and financial growth is acceptance and facing the facts. As it says in the bible,

"The Truth shall set you free!"

Oh, how true it is! The truth will set you free - if you will courageously face the truth and be wise enough to learn from it and take corrective action.

So go ahead, get your financial life back on track by answering these financial checkup questions!

Note: These questions are for your personal use ONLY and will not be shared with anyone. Do not send us the answer to these questions or show them to anyone unless you trust them completely.
We recommend you answer these questions in your own personal Financial Journal. Go out and buy a clean, crisp notebook and label it your "Financial Journal." In it, you will write information about your monthly income, expenses, debts, assets, goals, dreams, financial wisdom and ideas, and much much more.



Financial Checkup Questionnaire

1. What is your monthly income? - Write down every source of income in detail.

2. What are your monthly expenses? - Write down every expense in detail. Go over your credit card statements, checkbook, and cash purchases you've made in the last 6 months and make sure you don't miss anything. "The truth will set you free" - do you know the truth about your expenses?

3. How much debt do you have? - Write down in detail every source of debt - credit cards, mortgage, auto loans, lines of credit, personal loans, etc.

4. What are your assets? - Assets are things that you own that you can sell. If you have $20,000 in equity in your home, that is an asset (assuming that you could sell it). Other assets could include cars, big screen TVs, businesses, websites, oil and gas contracts, stocks, retirement accounts, bonds, mutual funds, savings accounts, etc.

5. Are you behind on any bills? - Write down what bills, if any, you are behind on. For example "3 months late on Visa Credit Card," "2 months late on mortgage," etc.

6. What is your credit score? - Read further for more information about your credit score.

7. What other ways could you earn extra income? - This could include taking another job (not recommended if you already have a full-time job), starting a part-time business (highly recommended for tax benefits and flexibility), doing freelance work, selling on eBay, starting a web business, etc.

8. How could you reduce your monthly expenses? - What are you spending money on that's not necessary? Could you shop less, buy less goodies and treats, cancel some monthly subscriptions to things you're not using? Write down every way you could reduce your expenses and still maintain a good quality of life. Then choose which ones you want to eliminate.

9. Who am I taking financial advice from? - This is one of the most important questions to ask yourself. Who are you taking financial advice from? How are they qualified to give you financial advice? The problem is, most people take financial advice from their broke neighbors and family members and so they end up broke! My mentor told me, and I'll NEVER forget it - "If you want advice on how to succeed financially, only take financial advice from those who are more successful than you." Where can you find people who are financially successful? There are thousands of books on financial success you can read (this one is a great start!). See the Bonus at the end for a list of excellent financial books you can read to help you achieve financial success.

If you've not been paying your credit card bills, what should you do?

Because so many people are defaulting on their credit cards and high unemployment, banks and collection agencies are more willing to settle credit card loans at a discount, and at higher discounts than they used to. If you haven't made any payments on a credit card for 6 straight months (billing cycles), then the credit card company will "charge off" your credit card account. They will close the account and write it off their books. At that point, the bank will either call you internally to collect the bill or a collection agency will contact you to collect the bill. This is when a settlement becomes possible.

NOTE: It is virtually impossible to settle a credit card bill at a discount if the account is open. Thus, you must let the credit card company charge off your account by not paying for 6 months in order to settle at a discount. Don't try to settle credit card bills that are current - it won't happen!

I got a letter from a collection agency. What do I do?

Now's the time to shine. You can settle your credit card loan at a 20-80% discount, depending on how long it's been since charge off, what kind of credit card it is, and what kind of agency you're dealing with. If the account was just recently closed and charged off, you're likely to be able to settle with a 20-60% discount. If it's been more than 12 months, you should be able to get a 60-80% discount. After two years, you might be able to get up to a 90% discount if you're lucky. Remember though, this discount includes all the accrued interest and fees which add up when you don't pay even after the account is closed.

So let's say you maxed out your credit card at $5,000, stopped paying, and then 6 months later you get a letter from a collection agency. By this time, you probably owe around $6,000 because of interest and fees. If you settle at 20% off, you will only have to pay $4,800. Not a big savings. But if you can get a 60% discount, you will only have to pay $2,400 - less than half of what you borrowed!

NOTE: We do not recommend or endorse nonpayment of credit cards or any other loans. You should pay all your debts according to your contracts. This information is for informational purposes only and for those who are already in trouble and want to understand how they got there and how to get out of their debt problems ethically.

Why would a collection agency allow me to settle at such a big discount?

Some collection agencies are hired directly by the credit card company. In that case, they're likely to have strict guidelines for settlements. Generally, right after charge off (6 months of nonpayment), the maximum discount a collection agency can accept is 20%. Thus, you only get $1,000 off that $5,000 bill. Not a big discount, but a decent one.

Other collection agencies purchase the accounts from the banks and credit card companies. These agencies range from small to large and have various standards and policies. Generally, agencies who bought the account - who now OWN your credit card loan - are willing to settle at a bigger discount. This is where you can settle at 40-60% off and better.

Make no doubt about it - if you don't pay the bank, they WILL sell your loan. They want the cash and if they don't think you'll pay, they'll take the cash from a buyer who is willing to buy your loan.

Not paying your credit cards or any of your bills will severely lower your credit score. If you're looking forward to purchasing a house or getting a car loan in the next 3 years, you should definitely pay your credit card bills. Because if you don't pay your bills, your credit score will probably drop below 600 and it will be almost impossible for you to get a mortgage or auto loan.


What You Need To Know About Your Credit Score Before Settling a Debt

Before you settle a credit card loan with a collection agency, you need to ask them...

Key Question to Ask the Collection Agency: "How will this be reported to the credit bureaus?"

Collection Agencies have two options:

1. Report it as "Settled in Full"

This is by FAR the best option for you! This will help boost your credit score and will look good on your credit report when your banker pulls it up.

2. Report it as "Settlement Offer"

This is the worst option for you, but may be necessary in order to settle the debt. This option will not raise your credit score as much as a "Settled in Full" report. Also, when your banker looks at your report and sees that you've taken settlement offers, they know you haven't payed your creditors the full amount you owned. This looks bad for you. Why should your banker trust you to pay your loan in full when you haven't paid your credit cards in full?

RULE #1: Always ask the agency to report it as "Settled in Full!"

Note: For more information about your credit score, see Chapter XX


Do I need a Bankruptcy Attorney?

This is not a question I can answer definitively one way or another in a general textbook. You might want to consult with a bankruptcy attorney if you are considering bankruptcy. You have to understand the bankruptcy costs and the entire drawn-out process of bankruptcy. It's a very long, painful, slow experience that drags on and can be a nightmare. Of course, being in debt for years can be a similarly painful experience.

Costs of Bankruptcy

It only costs a few hundred dollars to file bankruptcy ($299 for Chapter 7, $274 for Chapter 13, $1,039 for Chapter 11 which you are probably not considering unless you own a business).

Note: I'm not going to explain all the details of Chapter 7, 11, and 13 bankruptcies. It's just not that important to teach you what I have to teach. If you want more details about this info, there are plenty of great websites you can search for online for free).

The real cost of bankruptcy will be your Attorney Fees. These range, but are generally several thousand dollars and as much as $50,000 or more in Chapter 11 cases.

The whole point of bankruptcy is to get all your lenders together and force them to negotiate and work with you on repayments, or forgive the debts altogether in some cases. The information in this ebook will help you settle your credit card debts at a discount. The same ideas can be used to settle other debts at a discount such as unpaid medical bills (although not mortgages).

2. Credit Card Trends and Industry

The credit card industry is going through a lot of changes right now, as is the entire financial industry in the United States in the aftermath of the financial crisis. In July 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly called just "The Dodd-Frank Bill.") The Act created the Consumer Financial Protection Bureau (CFPB). The CFPB consolidates most Federal consumer financial protection authority in one place. "The consumer bureau will remain focused on one goal: to watch out for American consumers in the market for consumer financial products and services," according to the CFPB website (www.consumerfinance.gov).

Why is the CFPB Important?

The CFPB is important because it will start writing regulations and enforcing laws in July 2011 and will be the major "defender" and enforcer of rights for those in credit card debt and those who have been abused by financial institutions. As the CFPB is brand-spanking new and headed up by Elizabeth Warren, who is very anti-credit card companies and very pro-consumers, there's likely to be a boatload of new regulations that will further protect consumers and reduce the ability of credit card companies to abuse consumers. So, in short, if you have credit card debt, now might be a good time to sit on it... and wait until the CFPB passes some stricter legislation that will protect you and make it easier for you to settle it at a discount as discussed in Chapter 1.



The three major credit bureaus are:

Experian (Experian.com)

Transunion (transunion.com)

Equifax (Equifax.com)



How it effects your credit score

THE FICO Credit Score Formula

What Makes Up Your FICO Credit Score Score:

Payment History - 35%

Amount You Owe - 30%

Length of Credit History - 15%

Types of Credit You're Using - 10%

New Credit - 10%

Before your start shopping for a new home, be sure to check out your credit score. In the past, a 720 could get you the best rates available, but no more. The bar has now been raised to 750 or higher. You can take steps to improve your credit score, but you need to know where you stand first.

Order a credit report from all three of the major credit bureaus at www.annualcreditreport.com. By law, you are entitled to one free credit report a year from each of the credit reporting agencies, which are: Equifax, Trans Union and Experian. You may also receive a free report anytime that you have been turned down for credit. Be sure to obtain a copy of the credit denial page from the creditor. Once you receive your credit reports, check them carefully for errors that could affect your score. Look for accounts that may not belong to you. Look for accounts that may show delinquencies that did not occur. Credit bureaus are required to investigate disputed items, usually within 30 days.

You can order all three reports at once or you can stagger them out over the year to monitor any corrections that have been made. But, if you plan to refinance within the next few months, order all three credit reports now. All lenders will review your credit reports thoroughly so it is important to make corrections before you apply for a new loan. Be sure to buy your credit score when you order the credit reports because that is not included on free reports. When you obtain your free credit report from Equifax you can buy your FICO for $7.95. You can also order your score from Fair Isaac's website www.myfico.com. True Credit is Trans Union's website. Prices range from $15.95 for a FICO score and one credit report to $47.85 for all three scores and reports. Once you know where you are with your score you can take steps to improve it.

The cheapest option is just to go to www.FreeCreditScore.com and you can get a $1 trial and a credit report. Just make sure you cancel in the first 30 days or you'll be charged a monthly fee of $14.95.

Pay your bills on time. Your payment history counts for 35% of your score. A late payment can stay on your report for up to seven years. Remember: a two dollar late last month, is more damaging to your score than a three year old bankruptcy! The older the late payments are, the less effect they will have on your score. The last 24 months are the most important.



Reduce your debt. The amount of debt you have outstanding as a percentage of your available credit limits accounts for 30% of your score. If you have a credit card with a $10,000 limit and a balance of $5,000 your "credit utilization" is 50%. Your credit score reflects the debt ratio for each of your cards as well as the ratio for your overall debt. Reducing your credit utilization is one of the most effective ways to improve your score. Reduce your individual and total balances to under 30% of your available credit.



Don't open new accounts. (AndDO NOT close any open accounts). Opening new accounts to improve your credit utilization does not work if you already have at least three revolving accounts. That strategy will hurt your score more than it would help. If you apply for a new credit card or other type of loan, the lender will request your credit record and that inquiry will show on your report. A few of these inquiries and it will hurt your score dramatically. Requesting your own credit report does not impact your credit score. The length of your credit history counts for 15% of your FICO score.


BONUS. List of Financial Success Books

1. Think and Grow Ric
2. Rich Dad Poor Dad
3. How I Lost a Million Dollars
4. The Richest Man in Babylon



Get the entire How to Settle Credit Card Debt at a Discount eBook for FREE with even more information about settling your credit card debt and some amazing free bonuses by filling in the form at the top of this page.