What is a reasonable settlement offer for credit card debt?

Americans are carrying over $1.23 trillion in credit card debt right now, and for the borrowers who are struggling under the weight of this debt, that's not just a number on a spreadsheet. It's rent payments made on plastic, medical bills that couldn't wait and groceries charged when the checking account ran dry. And, in many cases, these charges were a last-ditch attempt at trying to make ends meet in today's inflationary environment.

The problem is, though, that amid these hurdles, average credit card interest rates are also sitting at record highs of over 22%, and as the interest charges compound month after month, the debt hole only gets deeper. In turn, many borrowers are now looking for a way out, or at least a way to make their credit card debt more manageable. That's one reason the idea of debt settlement has crept back into the conversation, particularly for people whose financial situations have taken a sharp turn.

But knowing about settlement and knowing what to offer are two very different things. So what exactly is considered a "reasonable" settlement amount on your credit card debt? And how much room do you have to negotiate?

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What is a reasonable settlement offer for credit card debt?

While it can vary drastically, the sweet spot for most debt settlements falls between 50% to 70% of your original balance. So if you're staring down $10,000 in credit card debt, a reasonable opening offer might land somewhere between $5,000 and $7,000. That range reflects what creditors have historically accepted after they've weighed the options and decided that a guaranteed partial payment now makes more sense than risking getting nothing at all. 

That said, there are multiple variables at play, and your starting offer matters. Many debt relief experts recommend starting the offer at around the 30% mark because it gives you negotiating room. Creditors rarely accept the first number you throw out, after all. They'll almost certainly counter with something higher. So, if you start at 30% and they push back to 50%, you're still in reasonable territory.

The equation changes dramatically, though, depending on who currently holds your debt. If you're still dealing with your original credit card company and your account isn't severely delinquent, they typically won't accept a whole lot less than what you owe. Original creditors have less incentive to negotiate when they believe you're still capable of making payments, even if those payments are only the minimums.

But once your account crosses that 180-day delinquency threshold and lands with a collection agency, the dynamics shift completely. Debt collection agencies may be willing to accept up to 50% of the debt as a settlement, and will sometimes take even less. That's because these agencies will typically purchase debt portfolios for pennies on the dollar, which means they can still profit even if they accept significantly reduced settlements.

The age of your debt plays a crucial role, too. The older your debt gets, the more leverage you gain in negotiations. A debt that's been outstanding for two or three years carries more urgency for creditors than one that's only a few months past due. Having cash available for a lump-sum payment can also dramatically strengthen your negotiating position. Creditors will commonly accept a lower percentage if you can pay it all at once rather than spreading it across monthly installments, which are a lot riskier in terms of default.

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What to consider before negotiating a settlement

Before you make that first call or start working with a debt relief provider on negotiations, be sure to keep the following in mind:

Your credit score will take a hit. Settlement typically comes after missed payments, which already damage your credit. The settled account will also be reported as "settled for less than the full balance," which remains on your credit reports for up to seven years. For many borrowers with overwhelming debt, the relief outweighs the credit impact, but it's important to know what's ahead.

You may owe taxes on forgiven debt. The IRS generally treats forgiven debt of $600 or more as taxable income, so you could end up owing extra taxes if your negotiations are successful.

Debt settlement may not be the best option. If you're only slightly behind or still able to make minimum payments, other solutions — like debt management, a balance transfer or consolidation — may be more cost-effective and less harmful to your credit.

A debt relief expert can strengthen your position. The experts employed by debt relief companies negotiate directly with creditors every day, so working with one can streamline the process and may even lead to better results.

The bottom line

A reasonable settlement offer for credit card debt often falls between 50% and 70% of your total balance, but your personal situation, account history and creditor policies will ultimately shape what's realistic. Before you begin, though, just be sure to weigh the credit and tax implications, understand your negotiating leverage and explore whether other debt relief options might fit your needs. The more informed you are going in, the better positioned you'll be to secure a manageable and fair agreement.