How to Pay Off a Credit Card at Less Than You Owe


If you are swamped with credit card debt but come into a lump sum of money, it may make sense to make an offer to one or more of your creditors to settle the debt for a lower amount than you owe. This helps you avoid high interest rate charges and allows the bank to take that money and lend it to someone else right away. One technique is to contact all your creditors at once and get a settlement offer from each of them, then pay the available funds to the bank that gives you the best deal.

Contact the bank that issued the card. Use the phone number on your monthly statement or on the card issuer's website.

Speak with a manager. Many times, the first-line call center employee does not have the authority to enter into a full debt-settlement agreement.

Ask what it would take for the bank to consider the account "settled in full." That means the bank considers your obligation to have been fulfilled, agrees not to pursue any further collection efforts on the account and notifies the credit-reporting bureaus that the account has been settled in full.

Request a "letter of understanding" from the bank. This protects you in case the bank fails to notify the credit bureaus or continues trying to collect on the debt.

Pay the settlement amount. Do this only after receiving the letter of understanding from the bank. Keep the letter for your records.

Check your credit report. The bank must notify the credit bureaus that the debt has been settled in full within 30 days of receiving your payment. Check your credit report after two months to verify that the information is correct. If not, write the credit bureau with evidence of payment and a copy of the letter of understanding challenging the debt.

Tips & Warnings

  • Some banks will agree to settle the debt with a payment plan if you don't have a lump sum. The process is the same, however: Have a letter of understanding from the bank guaranteeing you that it will consider the debt settled in full once you have completed your payment program.
  • You may be liable for income taxes on the amount of debt forgiven.

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