If you’ve found yourself with an inescapable amount of credit card debt, take a deep breath. You have options. Those options will depend on how much debt you have, your relationship with your credit card company, and how much money and resources you have at your disposal. One of the first options you might want to consider is negotiating your debt with your credit card company. Not all issuers will be amenable to this approach. However, your issuer is probably more willing to work with you than you assume.
When a credit card company is dealing with a consumer who has an exorbitant amount of debt, they essentially have two options: send your account to a debt collector and risk never seeing repayment, or making a deal. In other words, it can work out well financially for your issuer to meet you halfway.
If you are considering negotiating your credit card debt with your issuer, there are several things that you need to do to prepare yourself for the negotiation.
1. Assess Your Financial Situation
First things first: Figure out how much debt you’re dealing with. If you have multiple credit cards, compile your most recent statements or log in to your online or mobile banking app. Then take notes of some of the important information on your accounts:
- Credit card company
- Type of credit card account
- How much you owe
- Interest rate
- Customer service numbers
Once you decide how you want to handle your credit card debt, it’ll help to have all of this information in one place.
2. Decide How You Will Handle Your Debt
Before you even call up your credit card company, you need to know what you’re asking for. There are different methods for tackling unsecured debt. To set yourself up for success, you should choose the plan that works well for your finances and is therefore a plan that you can stick to.
Just as it sounds, a lump-sum settlement — also called a lump-sum payment — allows you to pay off a credit card with a single, large payment rather than chipping away at it over time.
With a lump-sum payment, the credit card company usually agrees to let you pay less than what your balance is, which might be your principal balance with no added interest. Lump-sum payments can be beneficial as they help you pay off your debt quicker; however, you need access to a large amount of money all at once if you want the plan to work effectively.
While your credit card company would ideally like to recoup the interest that has accrued on your account, a lump-sum payment is not always a bad deal for them. The alternative may be that you do not pay off your debt at all, making the company out a lot more money.
With a workout agreement, you can request that your credit card company adjust certain aspects of your credit card account to help you pay off your debt quicker. For instance, you can ask them to:
- Lower your interest rate
- Reduce or waive your minimum monthly payments
- Waive or refund your late fees
A workout agreement can be an ideal option if you are experiencing instability in some financial or personal capacity. If you go this route, it’s important to have some sort of steady income stream so you can keep up with your monthly minimum payments, even if they are reduced.
Workout agreements can help you regain your footing by cutting down on the overall amount of money that you owe to your credit card company and in turn pay off your debt quicker.
If you are dealing with a change in employment status, serious illness or injury, death, divorce, natural disaster, or if you are in some other form of serious financial or personal distress, you should inquire with your credit card company about a hardship plan.
These structured payment plans typically include reduced interest rates, minimum monthly payments, and fees. You may even be able to put your credit cards into deferment or forbearance until you feel more financially stable. Don’t hesitate to ask your credit card company if you do fall into one of these categories — issuers build out these programs for a reason, so you should take advantage of it.
3. Weigh the Alternatives
There are other options to deal with debt aside from negotiating with your lender. For instance, you can transfer your balances, take out a debt consolidation loan, or tap credit counseling agencies or debt settlement companies to help you find a solution.
A balance transfer credit card can be a smart move if you qualify for one. The 0% introductory APR allows you to pay off your debt quicker and with less interest if you make consistent, on-time monthly payments.
However, it’s important for you to maintain a strict monthly payment schedule. The standard introductory time period for balance transfer cards is 6 to 18 months. If you do not repay your credit card debt by the end of the introductory period, a standard interest rate will kick in.
Unfortunately, the rates on these credit cards tend to be higher than average credit cards, which could force you to pay more in interest to your lender.
Luckily, balance transfer credit cards do not tend to come with annual fees; however, you’ll likely get stuck with a balance transfer fee, which is charged for transferring a balance from one card to another. The fee hovers around 3–5% of the amount transferred. You can either find a credit card with no balance transfer fee, or negotiate to have the fee waived before initiating the transfer.
Debt consolidation loan
A credit card debt consolidation loan is a type of personal loan and another form of debt repayment offered by a lender, bank, or credit union. Similar to balance transfer credit cards, debt consolidation loans typically come with low introductory rates that expire after a certain period of time, so it’s important to manage your repayments meticulously.
Many lenders allow you to get pre-qualified for debt consolidation loans. When you get pre-qualified before submitting an official application for the personal loan, the lender only runs a soft inquiry on your credit report rather than a hard inquiry, which means your credit score will not be damaged. Pre-qualification allows the lender to estimate your loan terms and rates before you apply so you can decide whether it’s the best decision for you.
Your rates and terms depend heavily on your consumer credit score. In general, someone with a positive credit score is rewarded with lower interest rates and larger loan amounts whereas someone with a lower credit score won’t have access to these offers.
Rates, fees, and repayment timelines vary greatly among financial institutions, so it’s essential that you read your terms carefully before accepting an offer to make sure that the deal helps you save time and money.
Debt management happens through credit counseling agencies. A counselor typically works closely with both you and your credit card issuer to develop a debt management plan and repayment timeline, which includes grouping several credit card balances together if necessary, reducing your interest rate, and setting up minimum payments. The agency then ensures that your payments get where they need to go — in full and on time.
There are usually monthly fees involved with debt management plans and a strict repayment schedule that you must abide by in order to qualify for the service.
Debt settlement through a for-profit company should be considered a last resort before bankruptcy if you’re struggling with debt. Rather than negotiating with your credit card company yourself, you pay a debt settlement company a hefty monthly fee to negotiate with your credit card company on your behalf. Once the debt settlement company reaches a deal with your issuer — typically in the form of a lump-sum agreement — the company settles your debt and collects a service fee from your monthly payments.
For both debt management and debt settlement programs, it’s important to beware of debt settlement scams. Often, these fraudulent companies offer to help you get out of debt quickly and require you to pay them either a fee or in full in order to take advantage of the service.
4. Understand the Risks With Negotiating Debt
If you’re in a position to negotiate credit card debt, you’ve likely exhausted your resources and are just looking for the quickest, most responsible route to financial freedom. After you’ve explored the agreement options available through your credit card company, as well as the alternatives, it’s important to find a solution that makes the most sense for your personal and financial situation. Risks play a significant role in that decision.
When you negotiate debt with your credit card company, they may be amenable to certain agreements, but they might not want to continue lending to you — at least for the time being. With a lump-sum and workout agreements, your issuer will likely cut your credit line to keep you from charging anything to the card while you’re paying off your balance.
How does debt settlement affect your credit score?
Debt settlements and agreements can also impact your credit scores and lending opportunities in the future.
When you lose access to a line of credit, your available credit decreases while your credit utilization increases, both of which cause your credit score to decrease.
Depending how your credit card company reports your debt settlements to the credit bureaus it can impact your credit score. When a debt is “settled” or “charged off,” that means it is delinquent six months or more and unlikely to be paid off. If your issuer reports a lump-sum settlement to the credit bureaus like this, it will negatively impact your credit for up to seven years, and will likely affect your ability to get approved for loans and lines of credit in the future.
On the other hand, if your issuer reports your debt agreement as “paid as agreed,” “current,” or “account closed,” it won’t impact your credit score as negatively.
5. Contact Your Credit Card Company
If you’ve decided to negotiate your credit card debt on your own, it’s time to give your issuer a call.
Prepare your information
You prepared your personal and account information earlier in the process — now have it ready for the customer service representative. This includes your name, address, credit card balance, interest rate, and the type of agreement that you’re seeking.
Introduce yourself and clearly explain what you want
When contacting your credit card company, request to speak with the debt settlements or collections department. Explain who you are and the type of agreement that you’re hoping to reach. Don’t leave room for interpretation here.
It can be helpful to have a script so you can know what you want to say when you first get on the phone. This can also ensure that you won’t leave out any important information.
Start with something like: “Hello. My name is [your name], and I am currently struggling with my credit card balance, as I’ve recently been laid off from my job. I’d like to discuss my options through your hardship program.”
Have your points of leverage ready
Have you been financially affected by COVID-19? Are you a loyal customer who has banked with the credit card company for an extended period of time? Do you have multiple accounts with the financial institution?
Be patient but persistent
The representative will probably initially tell you that they don’t negotiate credit card balances. It’s okay to politely press the issue. That’s why you’ve presented your points of leverage.
Remember: The representative that you’re speaking with likely didn’t write the rules on debt settlement. A little kindness going a long way, and can even help change the representative’s point of view over the course of the phone call.
Sometimes success depends on the representative that you speak with, so try calling back a few days later to speak with someone new. You also shouldn’t hesitate to ask to speak with a supervisor — they may have more say over whether you will reach an agreement or not.
6. Get Everything in Writing
Most importantly, keep notes during your conversations and always ask for the names and titles of the people that you speak with. This can come in handy if you need to follow up with someone at a later date.
Once you’ve reached an agreement with your credit card company, it’s also extremely important to get the agreement in writing, including how the company plans to report your agreement to the credit bureaus. You don’t want to get a verbal interest rate reduction for 12 months over the phone only to learn after six months that the reduction has expired.
The person that you spoke with may move to a different department or even a different company. Even worse, your account could accidentally be sent to debt collectors or damage your credit score in some other way. Getting your agreement in writing can ensure that your negotiation is locked in no matter the circumstance.