Debt reduction: For Your Creditors, It’s All About the Bottom Line

Written by J.Bankston   // July 7, 2011   // 8 Comments

Credit Card

A new Card Hub study based on recent data from the Federal Reserve suggests credit card debt will rise by a net $20 billion this year, as consumers are paying down their personal credit card debt at a much slower rate than in recent years.

First quarter 2011 saw consumers pay down 26% less credit card debt than they did in first quarter 2010 and almost a full third less than first quarter 2009. That’s all well and good for credit card companies – the slower the pay down, the more they collect in interest and fees.

But some economists are predicting a double-dip recession, and warning that rising consumer credit card debt could make that second dip all the deeper. If you want to prepare for the worst, you’ll adjust your budget, stop borrowing and take immediate action to reduce and eliminate your credit card debt.

If your income is down and you’re buried in personal credit card debt, the quickest way to climb out of the hole, without declaring bankruptcy, is to settle your debt for less than you owe.

A settlement program will damage your credit score, but could dramatically improve your financial situation. If you have a legitimate financial hardship and enough credit card debt to at least consider bankruptcy, creditors will likely be more than willing to negotiate a principal reduction.

Why would a creditor zero out a credit card debt for less than the full balance? The answer is rooted in a simple axiom; an unalterable truth that you can trust is 100% accurate 100% of the time:

Your creditors will always, without exception, do what they believe is best for their bottom line.

For you, it’s very personal. This is money you borrowed with the expectation that it be paid back. Your good name is on the line. You gave your word. For you, your debt is intensely personal.

For your creditor, it’s never personal; all that matters is the bottom line.

Creditors have millions of cardholders across all income groups, so when unemployment hits 9%, they feel it on a practical level. As such, your creditors understand better than most that real hardships occur, and they need processes in place to deal with delinquent credit card debt.

Principal reduction is effective because it’s often best for a creditor’s bottom line IF you have a legitimate hardship AND you are a candidate for bankruptcy.

Bankruptcy is bad for you, sure, but it’s bad for your creditors as well. So in many cases creditors would much rather recoup a portion of the principal and write off the debt they forgave for tax purposes – it makes more sense for their bottom line than a bankruptcy.

Of course, creditors would much rather collect the full principal and a decade’s worth of interest from you; but if that’s not a viable option due to hardship – job loss or reduction in hours, unexpected expenses, medical problems, etc… – creditors can be quick to realize that a principal reduction is best for their bottom line.

Particularly if you’ve been paying on the cards for years – it’s possible the creditor has already collected so much from you in interest and fees that they could forgive a large portion of the principal and still count you as profitable.

To find out if you qualify for settlement, and if not what approach would be best to eliminate your debt and prepare for the worst, consult this Debt Coach tool. Find a plan, develop a budget, commit to it and take control of your credit card debt.


  1. By eMoney, February 23, 2019

    What about debt consolidation, or credit counseling? What should consumers know about the difference in those alternatives?

    I’ve played around with Debt Coach and it seems to give those as options.

    Otherwise interesting to see that consumer habits with credit card debt are back on up on the rise.

    I thought most consumers learned their lesson with the financial crisis.

    • By Katrina, February 23, 2019

      I’m not too sure about credit counseling, however with debt consolidation you are basically taking out another loan to pay off your many debts. When going this route you are basically taking all your debt and putting it under one belt so you can make one payment and usually at a lower interest rate then, for example, your credit cards rates. Ultimately you are also still paying your full amount of debt and let’s be realistic here, it is not always affordable and can take a really really long time to pay off. Going the debt resolution route at least you’re able to negotiate with your creditors on a amount that you may be able to afford right away or within just a few payments!

    • By JBanks, February 23, 2019

      Unfortunately most consumers have not broken free from what has become a culture of debt – bad habits are hard to break. Aristotle said “Moral excellence comes about as a result of habit.” Any of the programs outlined by the Debt Coach can help consumers develop different habits regarding spending and debt – the consumer need supply only the will to change.

    • By Mark Chen, February 23, 2019

      Credit counseling consists of two separate parts: a finacial review with your counselor and debt management plan, if your debt problem will benefit from it.

      Debt management plans are most effective when you have high interest rates on your credit cards AND can make the plan’s required payment for the 4-5 years it takes to complete it.

      If you can’t afford to make the payment in the debt management plan, look into debt settlement and bankrutpcy, in that order.

  2. By Tax-y Lady, February 23, 2019

    Debt Reduction can be a huge help to folks who don’t want to or can’t file for bankruptcy. Just make sure that no matter what option you take, you will need to keep complete records. If you agree to a settlement, you may get a 1099-C for your taxes from that creditor. You want to be able to check their information against yours for accuracy and contact them if you see a discrepancy, and you want to be able to properly file your taxes. Because there isn’t much point in moving from one creditor (the credit card company) to another (the IRS) when you can limit your exposure with good notes and records.

    • By JBanks, February 23, 2019

      The IRS can waive any tax liability resulting from the 1099-C form for settled debt. Ask your tax preparer about IRS Form 982 to see if you would qualify…

  3. By dolrdolrbill, February 23, 2019

    If debt reduction has a major impact to credit, how long would it take to get it back on track? This seems like the downside to debt reduction, and the most important part in putting yourself in a position to get back to getting better rates.

    • By JBanks, February 23, 2019

      Credit scoring is so convoluted and everyone’s history and credit mix is unique. It’s impossible to predict with any accuracy how far your score will drop and how long it will take to rebuild it. However, if you can’t pay your debt off on your own – if you’re buried with no hope of ever finding daylight – then your credit score is a distraction. For folks who are buried in credit card debt, this much is certain: It will take you far less time to repair and rebuild your credit than it ever will for you to pay down your debt.


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