What to do before negotiating credit card debt

Negotiating credit card debt is a last resort. Before you jump to that, you should see if there are any other options available.

Start by going over your monthly spending to see how much you could realistically put towards your debt. If you can reduce expenses and put together a plan to pay off your debt, that's a better way to go.

Find out whether debt consolidation or refinancing could be possible. This is more likely if you have a good credit score. Two popular options that can get you a lower interest rate on your credit card debt are:

If you can't pay off your debt and you need to negotiate, figure out what kind of deal you want to make with the credit card company. You could ask for a repayment plan with a lower payment amount, interest rate, or both. You could offer a lump sum payment to settle your debt.

The right choice depends on your financial situation. It's important to think about this before you contact your card issuer so you know what to request.

Step 3: Understand the risks

All these negotiation options come with downsides, and it’s important for you to be aware of them. The settlement you choose will depend on your financial situation.

With a workout agreement, your credit card company will likely cut your credit line, rendering your card unusable. This will also ding your credit scores because it lowers your available credit and increases your credit utilization ratio, which is the amount of debt you owe compared with your available credit.

Depending on how your credit card company reports the debt to the major credit bureaus, a lump-sum settlement can affect your credit scores.

If it reports the debt as “settled” or a “charge-off,” which is debt that is at least six months delinquent and likely won’t be paid, then your credit will likely be negatively impacted. If the company reports the debt as “paid as agreed,” “current” or “account closed,” there may not be a negative effect on your scores.

There are tax implications too, since forgiven debt of $600 or more may be considered taxable income, Sullivan says.

A hardship plan may also affect your credit scores, depending on how it’s reported to the credit bureaus. And your debt is deferred — not forgiven — so you still must pay it.

Many credit counseling organizations offer debt management programs for a small monthly fee, and negotiating this way generally doesn’t hurt your credit scores (but your credit reports may indicate that you are enrolled in a debt management program).

“I would tell consumers who want the least impact on their credit scores to go to a nonprofit debt management company rather than a settlement company,” Jacob says. “The consumer pays back the entire amount borrowed, so the creditors realize that working with us is to their advantage.”

On the other hand, a settled account can remain on your credit reports for seven years, which makes it challenging to take out a future loan, Sullivan says. It also can hurt your credit scores significantly because you aren’t issuing payments, making it more likely your account will go into collections.

Also note that debt settlement companies charge hefty fees for their services. Keep in mind that your forgiven debt may be considered taxable income as well.

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The Negotiating Process

Start by calling the main phone number for your credit card’s customer service department and asking to speak to someone, preferably a manager, in the “debt settlements department.” Explain how dire your situation is. Highlight the fact that you’ve scraped a little bit of cash together and are hoping to settle one of your accounts before the money gets used up elsewhere. By mentioning the fact that you have multiple accounts on which you’re pursuing debt settlements, you’re more likely to get a competitive offer.

Offer a specific dollar amount that is roughly 30% of your outstanding account balance. The lender will probably counter with a higher percentage or dollar amount. If anything above 50% is suggested, consider trying to settle with a different creditor or simply put the money in savings to help pay future monthly bills.

Last but not least, once you’ve finalized your debt settlement with your lender, be sure to get the agreement in writing. It’s not unheard of for a credit card company to verbally agree to a debt settlement only to turn over the remaining balance to a collections agency. Be sure the written agreement spells out the amount you have to pay in order to have your entire balance excused from further payment.

The Downsides of Debt Settlement

Although a debt settlement has some serious advantages, such as shrinking your current debt load, there are a few downsides to consider. Failing to take these into account can potentially put you in a more stressful situation than before.

50-70% The amount by which you might be able to cut your balances by negotiating your debt.

First, debt settlement generally requires you to come up with a substantial amount of cash at one time. This is what makes the debt settlement attractive to your lender because, instead of receiving minimum monthly payments for the next few years, it’s getting a much larger payment now. You’ll need to stop and consider where the funds are going to come from and how that money could be used elsewhere in your personal finances, and you want to make sure a large payment now isn’t going to leave you in a tight spot a few months down the road.

Second, you risk having your credit card account closed completely after the settlement is complete. In other words, your lender may drop you as a client because of your poor track record of paying back what you owe.

Third, debt settlement can affect your credit score adversely. This, in turn, will make it harder for you to borrow money at good interest rates or even to get credit at all in the future. If you need a good credit score, but have the luxury of waiting for it to recover in a few months, consider debt relief instead.

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Why negotiate credit card debt?

If you find yourself in over your head with credit card debt, it’s a good idea to see what your issuer can do to ease your load. The ultimate goal of negotiating credit card debt “almost always is to reduce monthly expenses,” said Michael Sullivan, personal financial consultant at Take Charge America. Negotiating credit card debt, adds Sullivan, “should be only done when necessary.”

You may believe credit card companies are unwilling to negotiate with you. This is untrue. Turning to your issuer could result in a mutually beneficial solution.

“One of the first things to remember is that credit card debt is unsecured debt, so it isn’t like a car loan where the lender can recoup money when the debtor is in default by repossessing the car,” said Steve Weisman, lawyer, college professor and financial expert. “Therefore, a credit card company may be more willing to work with someone having financial difficulties, particularly if they are not as a result of excessive spending, but due to other circumstances affecting the credit card holder’s income.”

Recognizing when you should consider negotiating your credit card debt is important. According to Laura Sterling, vice president of marketing at Georgia’s Own Credit Union, “If you are unable to make your monthly credit card payments, either because your debt is too high or you’ve experienced a hardship, it may be time to consider negotiating your credit card debt.”

Alternatives to debt settlement

Debt settlement is not your only option for getting out from under your credit card debt. Let’s take a look at some other options for debt relief that may be available to you.

Balance transfers

If you have multiple sources of high-interest credit card debt, you can consider doing a balance transfer. By transferring debt to a balance transfer credit card with a lower interest rate, you can make paying down your debt more manageable and can pay it down faster as more of your payments will go towards principal than interest.

Having all of your credit card debt on one card can make it much easier to manage your debt, as you’ll only have one monthly payment to make. This move only makes sense though, if you can secure a lower interest rate than you’re currently paying.

Debt consolidation

Similar to a balance transfer card, you can consolidate all of your debt by combining multiple sources of debt into one debt consolidation loan. This can make paying off your debt more convenient, and if you secure a lower interest rate you can spend less on debt payments. If you need help with this process, you can work with a credit counseling agency to come up with a debt consolidation plan.

Bankruptcy

While bankruptcy is typically viewed as a last resort, it may be the right path forward for you. When you file for Chapter 7 bankruptcy, you can get rid of most forms of outstanding debt such as credit card debt. However, some debt like back taxes, student loan debt and missed child support payments are excluded from bankruptcy.

Similar to debt settlement, filing for bankruptcy doesn’t help your credit score, but the bankruptcy process can go much faster, which allows you to move on and start to rebuild your finances sooner.

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Debt Settlement Companies

Debt settlement programs typically are offered by for-profit companies, and involve the company negotiating with your creditors to allow you to pay a “settlement” to resolve your debt. The settlement is another word for a lump sum that’s less than the full amount you owe. To make that lump sum payment, the program asks that you set aside a specific amount of money every month in savings. Debt settlement companies usually ask that you transfer this amount every month into an escrow-like account to accumulate enough savings to pay off a settlement that is reached eventually. Further, these programs often encourage or instruct their clients to stop making any monthly payments to their creditors.

Debt Settlement Has Risks

Although a debt settlement company may be able to settle one or more of your debts, consider the risks associated with these programs before you sign up: 1. These programs often require that you deposit money in a special savings account for 36 months or more before all your debts will be settled. Many people have trouble making these payments long enough to get all (or even some) of their debts settled. They drop out the programs as a result. Before you sign up for a debt settlement program, review your budget carefully to make sure you are financially capable of setting aside the required monthly amounts for the full length of the program. 2. Your creditors have no obligation to agree to negotiate a settlement of the amount you owe. So there is a chance that your debt settlement company will not be able to settle some of your debts — even if you set aside the monthly amounts the program requires. Debt settlement companies also often try to negotiate smaller debts first, leaving interest and fees on large debts to grow. 3. Because debt settlement programs often ask — or encourage — you to stop sending payments directly to your creditors, they may have a negative impact on your credit report and other consequences. For example, your debts may continue to accrue late fees and penalties that can put you further in the hole. You also may get calls from your creditors or debt collectors requesting repayment. You could even be sued for repayment. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home.

Beware of Debt Settlement Scams

Some companies offering debt settlement programs may engage in deception and fail to deliver on the promises they make — for example, promises or “guarantees” to settle all your credit card debts for, say, 30 to 60 percent of the amount you owe. Other companies may try to collect their own fees from you before they have settled any of your debts — a practice prohibited under the FTC’s Telemarketing Sales Rule (TSR) for companies engaged in telemarketing these services. Some fail to explain the risks associated with their programs: for example, that many (or most) consumers drop out without settling their debts, that consumers’ credit reports may suffer, or that debt collectors may continue to call you. Avoid doing business with any company that promises to settle your debt if the company:

  • charges any fees before it settles your debts
  • touts a “new government program” to bail out personal credit card debt
  • guarantees it can make your unsecured debt go away
  • tells you to stop communicating with your creditors, but doesn’t explain the serious consequences  
  • tells you it can stop all debt collection calls and lawsuits
  • guarantees that your unsecured debts can be paid off for pennies on the dollar

What you can expect to happen to your credit

A very important part of negotiating your credit card debt is understanding what to expect along the way so there are no surprises. Know that your credit score will likely be hurt during the process as you work on lowering your debt.

Your credit will continue to be impacted by late fees piling up and balances continuing to rise as you negotiate, but once your debt is paid off entirely your score can be on the rebound.

The timing of the whole process will depend on each client's case. Some cases may require a few phone calls, while other cases benefit from one or more in-person meetings that last an hour or more. "The total debt settlement process takes anywhere from one to five years depending on creditors, budget and complexity on average," Tayne says. "But that doesn't mean it can't be done sooner."

Tayne notes that although you might see a dip in your credit score, most of her clients report their scores going up before the negotiating process is done. And at the end of it all, your accounts will be up-to-date and your credit utilization rate will be much lower than before because you settled your balance and got rid of your debt. Both of these are factors that help boost your credit score.

Types of credit card debt settlements

Card issuers are likely to agree to one of three types of settlements. The best one for you depends on your current financial situation.

Lump-sum settlement

With this negotiation technique, you offer to settle your outstanding debt in one big payment, albeit for less than your balance. For example, you might owe $4,000 between charges, interest and fees on your credit card, but you ask the bank to accept $2,500 (your original credit limit) to settle the account in full. If the card issuer accepts, it will forgive the remaining balance.

Lump-sum settlements have two potential downsides. First, a notation may be added to your credit report showing that the account was “settled for less than the full balance.” This could be bad for your credit score. However, if your account was already past due, the notation may not cause additional damage. You also might have to claim the forgiven debt as income on your upcoming tax return and potentially pay taxes on that amount.

Workout agreement

A workout agreement typically involves your credit card issuer lowering your interest rate or temporarily waiving interest altogether. The bank may also be willing to take other steps to make it easier for you to keep up with your debt, including reducing your minimum payment and potentially waiving past late fees on your account.

On the other hand, your card issuer may close your account as part of the arrangement. Although your credit score is likely already damaged from late payments, closing your account (and thus wiping out your available credit limit) could raise your credit utilization rate. Credit utilization is responsible for up to 30 percent of your FICO Score, so if your credit utilization increases, your credit score may drop further.

Hardship agreement

Sometimes called a forbearance program, a hardship agreement may be an option if your financial setback is temporary. If you were to suddenly lose your job or have an unexpected illness or injury, you should call your card issuer right away to see if it offers a hardship program.

With a hardship plan, your card issuer may agree to lower your interest rate, suspend late fees or reduce your minimum payment on a temporary basis. You might even be able to skip a few payments while you work to rebound from the financial setback.

Unfortunately, your credit history and scores could still be at risk with this type of agreement. Depending on the terms of the bank’s hardship agreement, it may report negative information to the credit bureaus during the forbearance period.

How Do You Consolidate Credit Card Debt?

There are many ways you can consolidate credit card debt. The key is to get a single debt instrument that you can transfer all of your existing debt into. It could be a personal loan, a home equity loan, or even another credit card known as a "balance transfer card."

Be Persistent and Document Everything

If you want to negotiate with a credit card company, the process usually begins with a phone call. However, it may require long conversations with multiple people over days or weeks. Before you call, make sure you know exactly how much you owe, what your interest rate is, and any other important account details.

Ordinarily, you’ll need to explain that you’re hoping to work out a credit card debt negotiation so that you can make sure the credit card company gets some of its money back, even if it’s not the full amount, which is better than nothing. If you’re considering filing for bankruptcy, then also let the company know that, and tell them that you’d rather negotiate your debt repayment instead.

Don't give up if the first discussion doesn't go the way you'd like. These negotiations often happen over time. Be sure to document the details of every conversation you have and with whom you're having it.

If you do strike a deal, then be sure to get the terms of the settlement in writing to avoid future headaches and protect yourself.

As an alternative to pursuing a debt settlement with your credit card issuers, you could speak to a nonprofit credit counseling organization, which offers certified counselors trained in consumer credit, money and debt management, and budgeting. They help individuals create personalized plans to solve their debt problems and offer solid financial planning advice.

In addition, you might consider seeking assistance from a debt relief program. Pursuing debt settlement is a last resort because it involves stopping payments and working with a firm that holds that money in escrow while negotiating with your creditors to reach a settlement, which can take up to four years. Withholding payments from your creditors can seriously damage your credit score.

Ask for Help

Even though you don’t need to be an expert, sometimes it’s empowering to speak to a professional. If you decide to seek professional advice, look for an approved credit counselor. Most of these services are free and federally regulated. An accredited financial counselor or financial fitness coach can provide unbiased information to help you make a decision that best meets your needs.

Bottom Line

If you’re behind on your payments or have lost your income, speaking with your credit card provider is an important first step in managing your debt. By staying in communication with your creditor you can avoid additional fees and potentially protect your credit score. Knowing your options for renegotiating your credit debt and working with your creditor to develop a plan can set you on the path to bringing your credit card debt under control.

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