Credit Card Lump Sum Payments

In problems but coming into a windfall? Paying lump sums to clear your credit card debt

Lets look at an example situation based on a conversation I had on a radio show with a caller in September 2007.

The caller had come into some money and wanted to know if he would get any money back if he paid off his credit card debt in full with a lump sum- a little like early repayment of a loan.

First of all, credit cards do not work that way - interest accumulates each month whereas most loans the interest is calculated at the start and the payments are fixed - so early repayment might mean a repayment off the amount owing.

Anyway - it raised an interesting point that many people do not know about, and that is settling large credit card debts with lump sums opens the possibility of settlement with a far lower amount if the circumstances are right.

Only for those with credit card problems

Believe it or not, credit card companies will sometimes accept a drastically smaller lump sum as full and final settlement of the account. Why would they do this? simply because if they feel that in future they may not get any money at all then at least a lump sum now is better than little or nothing in future (credit card debts are bottom of the pile in terms of priority).

Back to the caller in question - his debts amounted to over £20,000 in credit card debts and he intended to pay them off in full which would have left him almost penniless. He had missed a few payments off his cards but making some sort of payment reasonably regularly but the card companies were aware he had problems and so his account would have been 'flagged'

The best advice here was to offer the credit card companies an offer of a full and final settlement of the account of 50% of the balance owing. Depending on their view of the account, their own policies and forecasts, they would either accept or reject the offer - and a rejection would be no worse than the current situation anyway. Often, card companies will come back with a counter offer that they will accept.

It is worth reminding at this point that if your account is without problem and you have been making all payments as normal then there is no reason why the card company would accept an offer of any sort - after all it is your debt and you're making payments so it is fair to expect that to continue.

This situation is only for those already heading down the path of financial problems and whose accounts are in delinquency or flagged as having payment problems.

The above case is just an example of what is a fairly common situation as people sell their houses to downgrade and release equity, come into inheritance, share options mature and so on.

Making a full and final settlement offer with your lump sum payment

If you do contact your credit card company and they agree to a reduced full and final settlement it is absolutely essential that any verbal agreement is followed up in writing. If you are advised or asked to send in your payment immediately then politely request a written letter is sent first so you can review it.

Top Advice: If your account is the hands of the cards' collections department (you might not even know it is) they are trained to recover as much money as possible and so might sound nice and helpful on the phone - like a new best mate - just to get you to send a lump sum payment in, but then still want the rest too. After all, if you can raise a lump sum like that then maybe you've got more stashed away?

• Send your lump sum payment with a covering letter that states "cashing this cheque numbered xxxx is acceptance of the offer of full and final settlement of account numbered xxxxxxxxxx and creditcarduk will remove all adverse credit information from my credit file as part of the conditions of this full and final payment"
• Staple the cheque to the letter
• Send your payment and letter as recorded delivery

Will my Credit Rating be affected by making a lower final payment?

When you agree terms of a full and final payment, make sure you specify that it is subject to the card company removing adverse credit information from your credit files. They may not agree to this but it is worth a try.

When you have this in writing that they "will accept £x as full and final settlement of your account and once payment has cleared will remove all adverse information from your credit files" you will be able ensure that they follow this up within 3 months (it can take 3 months for information to appear on your credit files).

If you uncomfortable with dealing with this on your own then we can help.

Contact us for more information

Important Note About Paying Lump Sums Off Credit card Debts

Please remember that all situations are unique and the above process is neither the best or right solution for some. It obviously opens up morality questions regarding avoiding paying debts, and if it is questionable at best for someone to deliberately make their account 'go bad' in order to try and reduce their debts in this way and still end up with clean credit file. We certainly would not recommend trying this route and if you are considering it then that in itself is a sign you probably need to talk to experts such as DCM Money Solutions

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