If you haven’t been able to keep up with your credit card payments, you will continually hear from your creditors as they push you to pay off your debt. Often they’ll offer a settlement, allowing you to deal with the debt by paying only a portion of the amount due. The discount they offer can be huge, often less than half of your balance, but it can be a mixed blessing.

Reduce What You Owe

One big advantage of settling credit card debt is that you reduce the total amount you owe. This means you’ll have less going out of your pocket every month to pay your credit card bills -- or less debt piling up as interest, late fees and penalties if you haven’t been making payments. Since these charges can equal or surpass the original amount of your debt, removing all such charges benefits you. Settling the debt will stop harassing phone calls and letters that you may have been getting since you first fell behind on your payments.

Effect on Your Credit Score

Settling your credit card debt results in the creditor writing off a portion of the debt. The settlement stays on your credit report for seven years and has a negative impact on your credit report unless you can get the company to agree to list your debt as fully satisfied, which doesn’t happen often. It’s still usually better to settle than to have an ongoing pattern of missed payments, since negative information becomes less important over time as long as you start making all of your payments when they’re due.

Getting Your Bills Caught Up

Removing credit card debt makes it easier for you to create a budget and stick to it, since there’s fewer creditors you need to pay each month and more money available to make your payments with. A good plan if you’ve fallen far behind on payments is to settle what debts you can and then make a budget that you can stick to. Prioritize your bills so that you cover the essentials, such as housing, food and utilities first, and then allocate the rest of your money for paying off any other bills you may have.

When the IRS Cares

When you pay off a credit card account by settling the debt, it can count against you at tax time if the amount the company writes off as a result of the settlement is more than $600. If it is, the credit card company or collection agency will send you a 1099 form at the end of the year. You must add the amount of the write-off shown on the 1099 to your income for the year and you’ll have to pay taxes on it just as you would on money you’ve earned by working.