Are you at the end of your financial rope when it comes to credit card debt? Do your monthly repayments rival your rent or mortgage? Do high-interest rates make it seem like you'll never pay down your balances? If you answered "yes" to any of these questions, it might be time to consider debt negotiations with your credit card issuer.
How do you accomplish that successfully?
7 Steps to negotiate credit card debt:
- Confirm how much you owe
- Determine whether you're a good candidate
- Review your options
- Establish your terms
- Contact your credit card issuer and negotiate
- Get your agreement in writing
- Pay the agreed settlement amount
Seems easy enough, right?
Not so fast.
There are several factors to consider before taking this course of action, and knowing how to do it properly is key to your success. In this post, we'll be breaking down each of the steps outlined above and giving you the skinny on credit card debt negotiations, complete with do's and don'ts for a favorable outcome.
How To Negotiate Down Credit Card Debt
Since credit card debt is unsecured, credit card companies are at risk if you default on your account. They can't come after your assets, so they're more amenable to negotiating a lower settlement amount if they believe you're on the brink of filing for bankruptcy. After all, getting some money out of you is better than receiving nothing at all.
Usually, you'll have three types of debt settlement options available. Each has its pros and cons and will lower your debt in different ways.
Option #1: Lump-Sum Settlement
This negotiation technique involves offering to settle your outstanding balance in one big payment that's less than what you owe. For example, if you owe $5,000 between your balance, fees, and interest, your credit card company may be willing to accept $3,000 (the limit on your card) as payment in full, effectively forgiving the rest.
Unfortunately, there are four potential downsides to a lump-sum settlement.
- You'll need to have a significant pile of cash upfront to pay the settlement amount.
- Depending on your credit card company's reporting policy, the transaction might be recorded on your report as a derogatory entry indicating that the account was settled for less than the full balance. This could hurt your credit score and remain on your report for up to seven years.
- There might be unexpected tax implications as you'll likely have to report the forgiven debt as income on your next tax return. The result is that you'll need to pay tax on that amount, so consult your accountant or a tax professional to find out how a lump-sum settlement will impact your taxes.
- There's a good chance your credit card issuer will close your credit card account and prevent you from reapplying for a new card for a specified period.
It's not all bad news, though. The upside is that you'll have your debt reduced and shed the burden of your credit card payments in one fell swoop.
Although the cons appear to outweigh the pros, the true value of this approach depends on your particular financial situation. Thankfully, there are two other options.
Option #2: Hardship Plan
Sometimes referred to as a credit card forbearance program, a hardship plan may offer relief with lowered minimum payments, reduced interest rates, and waived fees. Depending on the agreement with your card provider, you may even be able to skip a few payments while you get back on your feet.
This negotiation approach is especially helpful when your financial setback is temporary, as in the case of a sudden job loss, medical problem, or other unexpected hardship that takes a toll on your finances. If accepted, you'll be enrolled in the program with a structured payment plan that makes your credit card debt more manageable.
However, your credit card company may still report negative information to credit bureaus during this time. This can affect your credit history, putting your score at risk.
Option #3: Workout Agreement
With a workout agreement, your creditor can: 1) reduce minimum monthly payments, 2) decrease your interest rate, or 3) waive past late fees from your account. These actions will reduce your overall debt, allowing you to eliminate your balance in a shorter timeframe.
Credit card issuers will typically agree to this type of arrangement once your account is in default. However, these easier repayment terms will only be applicable for a specified period.
As part of the agreement, your card issuer can choose to suspend your credit card until you've completed the plan. During this time, you must remain in compliance with the specific payment schedule set out for you. If you don't, your account will revert to your regular terms and incur a penalty. In some cases, your credit card company will close your account once the debt is paid off in full.
When negotiating down your debt, you can either do it yourself or use a debt settlement company to act on your behalf. The biggest problem with the latter option is that these debt settlement services don't guarantee an outcome. In addition, they typically charge anywhere between 15% and 25% of your balance owed in service fees, which makes them incredibly risky. This can dig you even further into debt, which is why we recommend trying the DIY route first.
How To Negotiate Credit Card Debt Settlement Yourself
Believe it or not, a creditor will generally accept 40% to 50% of your outstanding balance. However, it can be as much as 80%, which is why you need to put your persuasion hat on your negotiating skills in full gear. Here are 7 simple steps you can follow to help you succeed.
Step 1: Confirm How Much You Owe.
Is your debt truly a mountain, or is it really a molehill?
Before you take any action, make certain you know exactly how much you owe, what your interest rate is, and how your debt is broken up according to the principal owed, interest, and fees. You'll then want to calculate how long it will take you to pay off. Use the nifty calculator below to check.
Here's the original site: https://www.easycalculation.com/mortgage/credit-card-debt.php]
Can you realistically pay off your credit card debt without catching a break? If not, how much can you afford? You'll want to ensure you don't overpromise and run into problems later.
Step 2: Determine Whether You're A Good Candidate.
Most credit card companies won't consider debt settlement options until your debt is 90 days overdue. In addition, it's simple finance smarts to consider every option available to you.
So, is your debt delinquent for three months or more? Have you considered alternative options like debt counseling, debt consolidation, or bankruptcy? Some of these options are less risky and won't hurt your credit standing as much.
Keep in mind that you'll potentially need a lump sum upfront if you're choosing that option. You'll also need confidence in your negotiating abilities, or you may be bullied into a repayment agreement that's not in your favor.
Step 3: Review Your Options.
Based on your particular circumstances, decide whether a lump-sum settlement, hardship plan or workout agreement makes the most sense. Take time to fully understand each approach so that you're not blindsided during negotiations.
Step 4: Establish Your Terms.
Knowing what you can afford, decide what you want. An interest rate reduction? A balance reduction? Waived fees?
There are two things you'll definitely want to negotiate: 1) how much you can pay and 2) how your debt settlement will appear on your credit report. Go to the negotiation table with firm figures and terms in mind.
When you start negotiations, start much lower than what you expect to pay in the end. For example, if you can afford to settle your debt for 50% of the balance, start with an offer of 30%. That way, you have room to counter any offers your credit card company might have until you reach an agreement that's in line with what you can afford.
Step 5: Contact Your Credit Card Issuer.
With your offer terms established, give your credit card company a call. You'll likely need to ask for someone in their financial relief department since a general customer service rep won't have the authority to approve your request.
When you're on the phone with the right person, explain your situation and present your offer. If you're considering filing for bankruptcy, let your credit card provider know that you'd rather work out an agreement with them directly.
Consider preparing a script beforehand so that you know how to frame your request. You should also follow our do's and don'ts list toward the end of this post. Just make sure you're prepared for rejections, counteroffers, and even a potential freeze on your account. Be persistent–even if it takes multiple calls–until you finally reach a settlement that works for both parties.
Step 6: Get Your Agreement In Writing.
Once you've hammered out acceptable terms, get the agreement in writing. This will protect you if an issue arises or your account is accidentally sent to collections.
Step 7: Pay The Agreed Settlement Amount.
Congratulations! You've accomplished your goal and reduced your debt burden. All that's left for you to do is pay what you owe and stick to the agreement terms. This means paying on time and paying every penny you agreed to pay. Failure to hold up your end of the bargain can result in disastrous consequences, ruining your credit status and preventing you from obtaining future lines of credit. If you're not paying a lump-sum settlement, consider setting up automatic payments on your bank account to ensure you don't miss a month or pay late.
How To Negotiate Debt With Credit Card Companies Successfully
- Do keep communication lines open with your credit card provider and inform them when your financial situation changes.
- Do ensure you do due diligence to determine how your credit card company handles debt settlements and the process involved.
- Do get to know your rights under the Fair Debt Collection Practices Act, especially concerning threats, public shaming, and harassment tactics creditors often use to make debtors feel intimidated.
- Do take detailed notes and save all communications as proof of your interactions with your creditor. You may need this in case of bad behavior on their end or if a dispute later arises over agreement terms.
- Don't let your credit card debt get to a stage where your provider hands you over to collections, as this can be detrimental to your credit score and financial health.
- Don't go to the negotiation table without leverage. If you've been a good client for an extended period, paying on time, making extra payments, and keeping your account in good standing overall, use that to negotiate a better deal.
- Don't let your frustration get the better of you. Even though negotiating credit card debt can be a stressful and emotional process, remain friendly. Creditors are more likely to be agreeable if you're calm and collected.
Credit card debt can be paralyzing, but there are ways to minimize your obligation. The key is to take action early so that you don't face intrusive and harassing calls, letters, debt collection agencies, or even lawsuits. DIY debt settlement isn't easy and will take up some of your time, but the payoff can be worth it–especially if it positions you for a healthier financial future.
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Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.