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How to negotiate debt with credit card companies

Bankrate logo Bankrate 3/10/2020 Michelle Black
a person standing in front of a bus: Man talking on phone while riding city bus. © Makistock/Shutterstock Man talking on phone while riding city bus.

Americans are no strangers to credit card debt. According to the Q4 2019 TransUnion Industry Insights Report, total credit card debt in the United States was $847 billion at the end of 2019. Meanwhile, the average credit card debt per borrower climbed to $5,834.

It's no secret that credit card debt can be a burden, especially if your credit card balances rise so high that you can't afford to keep up with the payments. If you find yourself in this stressful situation, negotiating credit card debt with your issuer may be a good option to keep you from falling further into debt.

Why credit card companies negotiate debt

When finances get tight, credit card payments are often one of the first bills people let slide. After all, credit card debt is unsecured. If you don't pay your auto loan or your mortgage, your car or house could be at risk. The same isn’t true with credit cards.

That's not to say that falling behind on credit card payments isn't dangerous. When you pay any bill late, credit card bills included, you may damage your credit. Credit problems can haunt you for years. Plus, if you default on a credit card bill, there's a chance the bank might sue you, and that leaves you vulnerable to more potential problems.

Still, credit card issuers are aware that your unsecured credit card debt may be at the bottom of your priority list if you're in a financial bind. When you fall behind on a credit card bill, the bank's priorities may shift. Rather than risk you ignoring your entire debt or filing for bankruptcy, a card issuer may be willing to consider negotiating credit card debt so that it gets back some of its money rather than nothing.

Credit card issuers also have an incentive to retain you as a customer -- so they may be willing to negotiate in order to maintain a lifelong relationship or keep you from missing payments.

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

A lump-sum settlement stands to save you the most money. But if you can’t find room in your budget to make a large payment to your card issuer upfront, it may not be a realistic option.

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.

There are two potential downsides to lump-sum settlements. First, a notation may be added to your credit report that shows 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 to negotiate credit card debt

Negotiating with credit card companies can be tricky, since many will likely be reluctant to change their terms unless they are worried about you filing for bankruptcy. Whether you choose to negotiate credit card debt on your own or hire a professional to represent you (more on that below), it’s best to come prepared to negotiations. Start with the following steps:

  1. Confirm how much you owe. Before credit card negotiation begins, check your account balance online or call your card issuer to discover your current balance. It's also wise to confirm your current interest rate on the account.
  2. Review your options. Decide if a lump-sum settlement, workout agreement or hardship agreement makes the most sense for your circumstances.
  3. Call your credit card issuer. If you've decided to handle negotiations on your own, call your credit card company and ask to speak with the debt settlement, loss mitigation or hardship department; a general customer service representative won't have the authority to approve your request. Once you're connected with someone who has the ability to negotiate with you, explain your situation and make your offer. Be polite but firm.
  4. Outline your terms. If you're considering filing bankruptcy or hiring a professional to help you with your debt, let the card issuer know and mention that you'd rather work things out directly. At this point, be prepared for the card issuer to potentially freeze your credit limit or close your account.
  5. Take detailed notes and follow up if needed. If you like, you can opt to record the call, although some states require you to let the card issuer know that you're recording the call and vice versa. Don't be afraid to ask for a supervisor or call back multiple times over the coming days and weeks if you're unhappy with the terms being offered.
  6. Get the agreement in writing. If the card issuer agrees to a settlement or arrangement that you're happy with, ask for documentation. You don't have a deal until you have it in writing.

Getting help with credit card debt

When you're overwhelmed with credit card debt, it might help to have a professional work on your behalf. In general, there are two types of companies that may be able to negotiate with credit card companies for you: debt settlement companies and credit counselors.

Debt settlement companies

Debt settlement companies are for-profit businesses that will try to negotiate lump-sum settlements with your creditors. Typically, you stop making payments to your creditors and start sending funds to your debt settlement company each month to build your account.

Once your account with the company grows large enough, the company will call your card issuer and make an offer to settle the debt for less than you owe. If the bank accepts the offer, the debt settlement company sends the funds to your creditor and takes a cut for its services.

Debt settlement companies can potentially save you time and money, but there are potential issues with this approach. First, if you stop paying your credit card company, it will report late payments to the credit bureaus. The account may eventually be charged off, sold to a collection agency or worse. All of these actions can have serious consequences where your credit is concerned. There's also no guarantee that your bank will be willing to negotiate.

You should also be aware that debt settlement companies aren't cheap. These companies typically charge a percentage of the amount they save you when they negotiate a debt. In the end, you could end up paying thousands of dollars for debt settlement services.

Credit counseling companies

A credit counseling agency may be able to help you negotiate credit card debt under an arrangement known as a debt management plan. A debt management plan, or DMP, may help you consolidate your debts and lower your interest rates.

If you meet with a credit counselor and determine that a DMP is a good fit for your situation, the credit counselor will contact your creditors (like credit card issuers) to try to negotiate a more affordable payment arrangement. If the credit counselor is successful, you begin making a single monthly payment to the credit counseling company, which, in turn, distributes smaller payments to the creditors included in your DMP. In general, a DMP may help you pay off your outstanding debts in five years or less.

Although credit counseling companies are often nonprofit organizations, their services aren’t free. Many credit counseling companies charge startup fees and monthly fees (often $25 to $35) when you enroll in a DMP. Over time, even these small fees can add up to thousands of dollars.

The bottom line

Credit card negotiation may feel overwhelming, but trying to avoid the problem will only make it worse. The truth is that you have many options for reducing your debt. Whether you choose to negotiate credit card payoff yourself or work with a professional, it’s important to carefully weigh your choices and come prepared when it’s time to call your credit card company.

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