August 13, 2024

Credit Card Debt Forgiveness: What is It & Who qualifies?

Credit cards can help cover bills and unexpected expenses, but the amount you have to pay back can quickly snowball out of control. When your balance grows into an unmanageable level, it can affect your lifestyle and add significant stress — but there are ways out.

Understanding how to get out of credit card debt and effective debt management methods can help you get back in control of your finances. If you're facing challenges in settling your debt and want to know what options you have, this in-depth guide will explain how credit card debt forgiveness works, how it affects your credit, and what steps you can take to settle your debt.

What is credit card debt?

Credit card debt is the money you owe (your balance), including any interest, for purchases you made on a credit card or credit account. Think of it like taking out a loan — whatever amount you borrow using your credit card, you must pay it back eventually.

You can quickly rack up credit card debt by making purchases and not paying down your balance. When you don’t pay down your balance by the monthly due date that your credit card company sets, you’ll owe interest on your remaining balance. Interest rates are often steep, around 15-20%, meaning the interest builds up fast and worsens your debt.

Credit card debt on its own isn’t bad. If you have some credit card debt and you consistently make payments on time each month, it can be good for your credit history and boost your credit score.

But if you miss multiple months of payments, your interest can build and your total debt will continue to grow, which is extra overwhelming if you have a large amount of debt on one or multiple cards. That’s why knowing how to manage your debt and the best tips to pay off credit card debt is so important.

What is credit card debt forgiveness?

Credit card debt forgiveness is when a debt collector agrees to cancel some of the debt you owe them. This typically follows your credit card issuer declaring your account "delinquent" — meaning you repeatedly missed required payments — after which they sell your debt to a debt collector. The collector becomes the new owner of your debt and will come seeking payment.

You can try to negotiate with the debt collector to reduce the amount you owe. For example, they may settle for taking a smaller lump sum instead of having you pay your total debt in increments. Once you come to an agreement and complete your payment, they consider your debt “forgiven.”

Sometimes, you can try to work out an agreement with your card issuer before they sell your debt to a collector, but this is rare. Plus, credit card debt forgiveness doesn’t simply wipe your slate clean — it can and will affect your credit history.

How to pay off credit card debt: Three common ways

To be clear, using credit card forgiveness to pay off your debts should always be a last resort, especially since it goes to a collection account first. There are better ways to handle your debt if you’re having trouble paying on time.

The three most common methods — the snowball method, the avalanche method, and consolidation — are some of the best strategies for paying off credit card debt. Here’s how each works:

1. Snowball method

The snowball method involves settling your smallest debts first. If you have several credit cards open, start with the account that has the lowest total balance. Make payments until you've paid off the balance, then move on to the next smallest account. Continue with this until you’ve paid off all your accounts.

2. Avalanche method

The avalanche method focuses on paying down high-interest accounts first. You’ll need to look through your accounts to figure out which one has the highest annual percentage rate, otherwise known as APR. Start paying down that card, and when you reach a $0 balance, move on to the next.

3. Consolidation

If you find the other two methods overwhelming, you can consider credit card debt consolidation, which combines all your debts into one. You can do this through a debt consolidation loan. With this type of loan, you add all your debts in one account — potentially with a better interest rate than your credit card accounts. This can help you focus on making payments toward your total debt without worrying about varying interest levels.

Another way to consolidate your debt is through a balance transfer. If your credit card issuer allows it, you can move your balance to another card with a lower interest rate or open a new line of credit offering a reduced interest rate. Some new accounts may even offer a promotional 0% APR for a limited time, like six months to a year, which can help you make payments without collecting more interest.

If you have good enough credit to obtain them, these options can give you time to pay your debt without adding significant interest charges, making consolidation one of the best ways to pay off credit card debt.

How credit card debt forgiveness affects your credit

The events that lead up to credit card debt forgiveness — like your card becoming delinquent and having your debt sold — show up on your credit history and can lower your credit score significantly.

When your credit card issuer labels your account delinquent for missed payments, this stays on your credit report (a detailed account of your credit history) for up to seven years. If they report your debt as unpaid or sell your debt to a debt collector, these show up in your credit history, too.

Having these events listed on your credit report will limit your financial opportunities because lenders will worry that you may not pay them back if they lend you money. You may have difficulty opening new lines of credit, acquiring home and auto loans, or borrowing money from lenders and banks.

The good news is that after two years, the impact on your credit report starts to lessen, and after seven years, the debt drops off your history. But seven years is a long time, which will significantly impact your financial well-being, so it’s best to pay off your debt in other ways.

How to negotiate credit card debt agreements

If you run out of strategies to knock down your debt and feel too swamped by what you owe, you may want to look into negotiation methods. You can try to work out a debt agreement with your credit card company or collection agency or you can set up a debt management plan. Here are a few ways you can recover when paying off your credit card becomes unmanageable:

Work with your credit card issuer

Before anything else, contact your credit card issuer and explain your hardships — whether you lost your job or are dealing with a negative bank balance. They’ll ask why you can’t afford or make minimum payments. They may not be willing to delay payments or reduce the total amount due, but it's worth a shot.

Use a Debt Management Plan (DMP)

Credit counseling groups, like the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA), can help negotiate a debt management plan for you. They may offer payment plans that last through an extended period of time, like three to five years, and the interest rates on the plans may be lower than your credit card interest rate.

If you accept one of these plans, they’ll close your credit card account, so you’ll no longer be able to use the card. But these plans can slow the build-up of interest and give you more time to pay down the debts, which is worth closing the account.

Work with the collection agency or debt settlement company

If a collection agency holds the debt, only they can forgive your debt. You can contact them and try to negotiate a smaller settlement, as most debt collectors would rather have some amount paid than none at all.

Declare bankruptcy

As a last resort, you may consider filing for Chapter 7 bankruptcy. This involves selling your assets, like property or cars, to clear your debts.

Bankruptcy will remain on your credit report for up to 10 years after you file, which can greatly limit your ability to open new lines of credit or borrow money. Only do this when you have no other options.

Balance your economic recovery with EarnIn

Knowing when to close your credit cards can improve your credit score. And managing your credit health by making sure you don’t have too much debt and doing regular checkups is essential.

To make it even easier, you can use a credit monitoring app to keep tabs on your finances. The EarnIn app offers precisely this, with our free credit monitoring tool that will send alerts when something changes and help you track credit details across all three major credit bureaus. Plus, EarnIn offers a credit card payoff calculator that creates personalized plans to help you tackle debt faster and smarter. Get started today.

Download EarnIn and give yourself the tools to keep moving financially forward.

Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.

1. Calculated on the VantageScore 3.0 model. Your VantageScore 3.0 from Experian® indicates your credit risk level and is not used by all lenders, so don't be surprised if your lender uses a score that's different from your VantageScore 3.0. Learn more: https://www.experian.com/assets/consumer-information/product-sheets/vantagescore-3.pdf