If you haven’t paid off all of your credit cards each month, you’re not alone. According to the Federal Reserve Bank of New York, US household credit card debt increased by $100 billion between the second quarter of 2021 and the second quarter of 2022.
Depending on how much debt you owe, you might not feel confident about getting out of it. However, learning how to negotiate credit card debt can provide you with a way to get relief.
Why should you negotiate credit card debt?
Negotiation can help you get out of debt faster. However, you won’t always be successful, and negotiation shouldn’t be your first course of action.
Consumers often consider negotiating after their debt has been assigned to a collection agency or after the creditor has hired an agent to handle communication, says Daryl Holman Jr., founder of debt elimination startup Revival. . “There are hardship plans that may come before that point, but what’s best for borrowers is to make their payments on time if they have the capacity to do so.”
If you are unable to make payments on time but your debt has not yet been collected, negotiating with your credit card company is a much better option than ignoring the debt altogether.
“If you have an account with a large balance that is already overdue, a large amount of money in the bank, and negotiation skills, it may be a good idea to negotiate a (lump sum) credit card debt settlement,” explains Leslie Tayne. , financial lawyer and managing director of Tayne Law Group in New York.
Understanding your options when negotiating credit card debt can help you reach a manageable deal. Note that if you have had credit card debt, go to a collection agency, you can negotiate with the collection agents.
What are your options?
When negotiating with credit card companies, you can look for a lump sum settlement, a hardship agreement, or a relief agreement.
Lump sum payment
This option obliges debtors to make a bulk payment in advance for an amount less than the debt owed. Once creditors receive lump sum payments, you can expect the account to be listed as paid in full on your credit report.
“A lump sum settlement is the best route for you because you’ll usually get the best deal from your creditor,” Tayne says. “Plus, your debt will be gone.”
Keep in mind that settling your debt for less than you owe will hurt your credit score, although settling is always better than having it written off your credit report.
Hardship plans are also called forbearance and can provide temporary relief to borrowers in need. For example, your creditor could reduce your minimum payment amount or interest rate or stop late fees, according to credit bureau Experian. However, unlike a lump sum settlement, you will still have to repay your total outstanding balance. After the hardship period ends, your regular account terms will return.
A ripple agreement is when the lender agrees to change the terms of the card, according to Experian. The creditor may reduce your minimum payment requirement or annual percentage rate or waive fees you have already incurred. If you still receive regular income, this option could be a solution to pay off your debt more quickly.
Advantages and disadvantages of negotiating credit card debt
There are pros and cons to negotiating credit card debt, whether your goal is to reach a lump sum settlement, a hardship agreement, or a relief agreement.
- Can provide financial assistance. Depending on the option you pursue, you may be able to reduce your debt, reduce interest and/or lower fees.
- Potentially slows bankruptcy. Negotiating your credit card debt can save you from having to declare bankruptcy. If creditors come to an agreement with you, they can avoid not receiving a refund if you go bankrupt.
- Mental and emotional relief. Dealing with creditors can be stressful. In addition to receiving financial help, negotiating your debt can ease fears of being sued or facing other consequences.
- Tax implications. When you pay less than you owe under a lump sum agreement, the Internal Revenue Service treats any forgiven debt as taxable income. That could result in a higher tax bill for that filler year, Tayne says. Make sure you are financially ready for this.
- Credit implications. When your credit report shows that a credit account is settled, it will negatively affect your credit score. However, this is not as bad as having the account listed as unpaid. Some creditors will close the account when you negotiate, according to Experian, and this can negatively impact your score.
How to negotiate your debt
There are a few steps to keep in mind when preparing for your negotiations with your credit card company.
1. Check the debt
Make sure you know how much you owe your credit card issuers before developing a negotiation plan. Typically, issuers sell outstanding debts to collection companies when they’re six months overdue, so you may not be able to negotiate with credit card companies on older items.
Once you’ve taken stock of your debt, move on to step two.
2. Choose an option
Explore the different options based on your financial situation and goals. A lump sum settlement may get you the best deal, but a hardship agreement may be a better choice if you only need temporary relief.
Also, it helps to have a list of terms you would like to apply. For example, you can request that your settled debt be shown as fully paid on your credit report, even if you settle it. The creditor may not agree, but it will help your credit if they do.
3. Contact your creditor
You can start by talking to a customer service representative from your credit card company. Throughout the negotiation, be polite, but stick to the terms that work for you. If you fail on your first call, don’t be discouraged. Call again and speak to another representative or supervisor who can provide decisive recourse.
4. Ask questions
During the negotiation, make sure you understand what you are required to do and what the creditor promises to do if you meet the terms of the agreement. If you don’t know what something in the agreement means, you should ask for an explanation. Some questions to ask might include:
- How long will the process take?
- How will the status of the account be reported to the credit bureaus once the terms of the agreement have been met?
- When can I expect the written agreement?
5. Get everything in writing
Make sure you get all the terms you want in writing before agreeing to a deal, says Scott Glatstian, attorney at Rosenblum Law. If the creditor has agreed to declare the account as fully paid, for example, this should be clearly stated in the agreement.
What to do if you need help negotiating your credit card debt
If you don’t feel comfortable negotiating your credit card debt on your own, there are other options.
For-profit debt settlement
For-profit debt settlement companies specialize in getting creditors to accept lump sum payments that are less than your total debt. However, beware of this option – some companies use high-risk tactics and there are fees.
The company will likely ask you to stop payments to the creditor altogether in hopes of getting a lump sum settlement. However, creditors could simply refuse to deal with the settlement company, according to the Consumer Financial Protection Bureau.
. In this scenario, you’ve racked up more late fees and penalties on the account and taken hits to your credit, and you still owe the debt.
Non-profit credit counseling
Nonprofit credit counselors work with you and your creditors to develop a debt management plan. You can find credit counselors through entities such as the Financial Counseling Association of America and the National Foundation for Credit Counseling.
According to the NFCC, counseling is often offered free or at low cost. Counselors can help you not only with the credit card debt in question, but also with budgeting and other ways to stay on track financially.
Alternatives to negotiating with your credit card company
Depending on your situation, an alternative approach might be more appropriate. Some options include:
- Debt consolidation loans. A debt consolidation loan simplifies paying off your debts by combining two or more accounts into one loan. You are left with a due date, interest rate, and minimum payment to track each month. You may also be able to get a lower interest rate on a debt consolidation loan than a credit card.
- Balance transfer credit cards. A balance transfer credit card can be an alternative to negotiating credit card debt if a high interest rate is causing your problems. Eligible borrowers can choose a card with a lower interest rate or a promotional 0% APR and transfer all or part of their credit card debt to it. If you are using a 0% introductory APR, make sure you make payments on time and pay the full balance before the end of the introductory period.