It’s the end of the month and it’s time to pay the bills. You glance at your credit card statement and, again, you can only make the minimum payment.
It’s a fate shared by many American consumers. Recent research shows that the average credit card debt per borrower was $5,525 in 2021.
If you have credit card debt that you’re having trouble repaying, it may be worth negotiating your outstanding debt with your lenders. You can negotiate with your credit card issuers to lower your monthly payments, lower your interest rate, lower fees, and more to make it easier to pay off your credit card balances.
Here’s a guide to negotiating your current credit card debt, plus ways to stay out of the cycle.
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 lighten your load. The ultimate goal of negotiating credit card debt “is almost always to reduce monthly expenses,” said Michael Sullivan, personal finance consultant at take over america. Negotiating credit card debt, adds Sullivan, “should only be done when necessary.”
You may think that credit card companies are unwilling to negotiate with you. It’s wrong. 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’s not like a car loan where the lender can recover money when the debtor defaults by taking over possession of the car,” said Steve Weisman, a lawyer, college professor and financial expert. “As a result, a credit card company may be more willing to work with someone who is having financial difficulties, particularly if they are not due to overspending, but to other circumstances affecting the cardholder’s income. credit card.”
It’s important to know when you should consider negotiating your credit card debt. According to Laura Sterling, vice president of marketing at Georgia’s Own Credit Union, “If you can’t make your monthly credit card payments, either because your debt is too high or because you’ve run into trouble, maybe it’s time to consider negotiating your credit card debt.
Types of Credit Card Debt Settlement
There are various approaches to settling your credit card debt for less than you actually owe. If you decide to negotiate your credit card debt, consider the following suggestions from Sterling and Paul Sundin, CPA and tax strategist:
Lump sum payment
Offering the credit card issuer a lump sum payment will ensure a lower balance to pay off your debt. Negotiate a reasonable lump sum for you.
If you face unexpected hardship, such as job loss or serious illness, many card companies have hardship programs that allow for temporary payment deferral or other changes to help you recover. get back on your feet. With this plan, a card issuer may also agree to lower your interest rate, temporarily reduce your minimum payment, or waive late fees. Unfortunately, your credit score can still be affected.
You can ask your card issuer to change your account by waiving past late fees, lowering the interest rate, or reducing monthly payments. Don’t be afraid to explore options with your card issuer.
Debt Management Program (DMP)
In a DMP, you work with a credit counseling company, which is usually a non-profit organization.
“A credit counselor will communicate with your creditors and negotiate a less expensive payment plan on your behalf. If the negotiations are successful, you start making monthly payments to the credit counseling company, and they make payments to your creditors,” Sterling said.
Although credit counseling companies are often non-profit, they are not necessarily free. Credit counseling companies often charge a monthly fee. Keep in mind that your credit report may also indicate that you are in a DMP.
debt settlement company
For-profit debt settlement companies try to negotiate lump sum settlements with creditors, although this is not the best choice.
“Debt settlement companies ask you to stop making payments to your card issuer and instead ask you to make monthly payments to your debt settlement company to create your account,” Sterling said. . “Once your account has grown enough, the debt settlement company will contact your card issuer and offer to pay less than you owe. If the issuer accepts the offer, the debt settlement company pays your creditor and keeps a percentage of the money you pay them.
This is often a last resort for debts, and if you choose this option, it will lower your credit score. You should watch out for less reputable debt settlement companies that make big promises.
How to Negotiate Credit Card Debt
Negotiating your debt is a manageable process – Sterling recommends the following approach:
- Find out how much you owe. Before you start trading, check a recent statement or contact your issuer to determine your balance owing and the interest rate.
- Make a plan. Decide if a lump sum settlement, training arrangement or forbearance makes the most sense for your situation. Do you want to manage the negotiations yourself or rely on a professional? Review your current financial situation and the risks involved.
- Contact your credit card issuer. If you have decided to handle the negotiations yourself, call your creditor and ask to speak to the debt settlement service. Explain your situation and make an offer. Prepare a script in advance so you know exactly how to make your request. Be honest, clear and polite. If the representative is unable or unwilling to negotiate, be prepared to ask to speak to a supervisor or call back.
- Take detailed notes. Document the dates and times of your conversations and keep the full names and titles of anyone you spoke with for reference.
- Get the terms in writing. If you are successful in negotiating your debt, put everything in writing. Make sure you understand and agree to the new terms.
How Does Credit Card Debt Settlement Affect Your Credit Score?
It’s understandable that you’re worried about how the debt settlement process will affect your credit score. Unfortunately, debt settlement can hurt your credit score. If you settle a debt with a creditor for less money than you originally owed, it can lower your score by 45 to 125 points.
Alternatives to Debt Settlement
Debt settlement isn’t your only option for getting out of your credit card debt. Let’s take a look at other debt relief options that may be available to you.
If you have multiple sources of high-interest credit card debt, you might consider doing a balance transfer. By transferring debt to a balance transfer credit card with a lower interest rate, you can make paying off your debt more manageable and paying it off faster because more of your payments will go to principal rather than interest.
Having all of your credit card debt on one card can make it easier to manage your debts because you only have one monthly payment to make. This decision only makes sense, however, if you can get a lower interest rate than what you are currently paying.
Similar to a balance transfer card, you can consolidate all of your debts by combining multiple sources of debt into one debt consolidation loan. This can make paying off your debt easier, and if you get a lower interest rate, you can spend less on paying off your debts. If you need help with this process, you can work with a credit counseling agency to develop a debt consolidation plan.
Although bankruptcy is generally considered a last resort, it may be the right course for you. When you file for Chapter 7 bankruptcy, you can get rid of most forms of unpaid debt such as credit card debt. However, certain debts like back taxes, student loans, and missed child support are excluded from bankruptcy.
Similar to debt settlement, filing for bankruptcy doesn’t improve your credit score, but the bankruptcy process can go much faster, allowing you to move on and start rebuilding your finances sooner.
At the end of the line
If you’re struggling with debt, contact your credit card issuer to start a conversation. Chances are they are motivated to come up with a plan to help them recoup at least some of their losses.
If you need help, consider contacting a professional credit counselor, but remember that they can’t do anything for you that you can’t do for yourself.