If your credit card account has been turned over to collections, there is nothing you can do about the damage to your credit, but you can start fresh and work hard to rebuild a better credit report.
There is a variety of reasons why anyone might fall behind on their credit card payments. The sad truth of it, though, is that credit card companies do not necessarily care what your reasons may be for missing your most recent payment. Although many credit card companies will work with you if you communicate and negotiate in order to preserve the relationship, there is only so much leeway that they can give you. If, however, you simply fall behind and cannot catch up, you better be prepared for the long trek out of the depths of credit risk hell.
The first thing you need to know is that settling your debt with a collection agent will not improve your score. The detriment has already been reported and the debt has basically been sold by the credit card company to the collection agency. Whatever has been sent to your credit report will remain there for seven years no matter what you do. While this is not necessarily the best of news, it should be a bit of a relief. It also provides you with a good place to start working towards a better financial future.
If you go into settlement negotiations, however, you should also know that your future credit inquiries are going to rely on how well you fulfilled your past credit obligations. Basically, then, if you settle for 50 percent of what you owe, future lenders will see that you did not fulfill your actual obligation. This could change the way future lenders approach your application for new credit.
If you still decide to go through with a settlement arrangement make sure that you have the agreed upon terms set in writing before you send any payments. One thing that many people overlook, though, is that if your agreed-upon settlement is lower than what you owe, the difference is actually considered income by the Internal Revenue Service. This means that you will have to pay income tax on the amount forgiven. So, if you owe $10,000, for example, and you are forgiven for half of it, you can expect to pay income tax on $5,000. Whatever happens, make sure that you keep copies of all correspondence. This is as much for your record keeping as it is for your security to make sure that you only pay what you owe.
When you reach this point you are basically back to square one with your credit history. Actually, you will be a little worse off than someone new to credit. The good news, though, is that there are tools available to help you rebuild properly and, hopefully, quickly. No matter what you do, rebuilding credit takes time so be patient. You may not be able to get credit right away but even if you do nothing to improve your credit the negative effects of the settlement will weaken over time.
If you cannot get a credit card right away (and you probably shouldn’t because the fees and interest rates will be astronomical) you could try to take out a secured credit card or a prepaid card. Secured credit cards require a security deposit that you will forfeit should you default. Prepaid cards, though, simply only allow you to pay what you have deposited. Yes, these are limited devices, but they give you access to credit-like benefits and, more importantly, the credit reporting behaviors you need to establish a new credit history.