How To Negotiate Debt With Credit Card Companies | Bank rate (2023)

Americans are drowning in credit card debt with an average credit card balance of $5,315, according to the findingsExperian. Öaverage credit utilization(the percentage of credit a consumer takes out of the total credit available to them) was 25.3% in 2020, the lowest level in ten years.

When you depend on credit cards to make ends meet, you may feel like you'll never get out of credit card debt. But you may have options if you can't pay off your credit card debt. One option is to negotiate your debt with credit card companies. This can help get you back on track and prevent further damage to your credit report.

Why Credit Card Companies Negotiate Debt

When finances get tight, credit card payments are often one of the first bills people skip. After all, credit card debt is not guaranteed. If you default on your car loan or mortgage, your car or home could be at risk. The same does not apply to credit cards.

That's not to say that delaying credit card payments isn't dangerous.When you pay overdue bills, including credit card statements, can damage your credit score. Credit problems can haunt you for years. Additionally, if you don't pay a credit card bill, there's a chance the bank could sue you, making you more vulnerable to potential problems.

Credit card issuers understand that your unsecured credit card debt can be low on your list of priorities when you are in financial distress. When you default on a credit card bill, the bank's priorities can change. Instead of risking ignoring the debt orCompetition, a card issuer may be willing to consider paying off credit card debt so you get some of your money back instead of nothing.

Credit card issuers also have an incentive to keep you as a customer, so they may be willing to compromise to maintain a lifelong relationship or prevent you from missing out on payments.

How does credit card billing work?

Credit card settlement is a type of debt settlement that allows you to pay off credit cards for less than what you originally owed. This is usually done through a third party agency, but you can also negotiate hardship options or lower interest rates yourself. If you hire a debt settlement company, you are responsible for sending payments to the agency and additional fees may apply for the service.

The advantages of credit card payments are obvious: you are debt-free faster without having to bear the full debt burden. However, your credit rating is likely to decline as a result of paying off the debt and could have future tax consequences. For example, if you pay off a $15,000 debt for $10,000, you could pay taxes on that $5,000 difference.

Types of credit card debt settlement

Card issuers are likely to accept one of three types of agreements. What is best for you depends on your current financial situation.

flat-rate billing

With this negotiation technique, you offer to settle your outstanding debt in a single payment, albeit for less than your balance. Example: You owe $4,000 in fees, interest, and charges on your credit card, but you ask your bank to accept $2,500 (your original credit limit) to pay off the account in full. If the card issuer accepts, they waive the remaining balance.

Flat rate billing has two potential downsides. First, a notation can be added to your credit report stating that the account was "paid off with less than the full balance." This can be bad for your credit score. However, if your account is already overdue, no additional damage may be caused to the reservation. You may also need to claim the forgiven debt as income on your next tax return, and you may have to pay tax on that amount.

training agreement

With a chargeback arrangement, the credit card issuer usually lowers your interest rate or temporarily waives interest. The bank may also be willing to take other steps to make paying off your debt easier, including lowering your minimum payment and possibly waiving late fees on your account.

On the other hand, the card issuer may close your account as part of the billing process. While your credit score is likely already being affected by late payments, closing your account (and thereby removing your available credit limit) can increase your credit utilization rate. Credit utilization accounts for up to 30% of your FICO score. So if your credit consumption increases, your credit score could continue to fall.

hardship agreement

Sometimes referred to as a forbearance program, a hardship agreement may be an option if your financial setback is temporary. If you suddenly lose your job or suffer an unexpected illness or injury, call your card issuer immediately to see if they offer a private assistance program.

With a hardship plan, your card issuer can agree to lower your interest rate, waive late fees, or temporarily lower your minimum payment. You can even skip some payments while you work to recover from a financial setback.

Unfortunately, your credit history and results can still be at risk with this type of contract. Depending on how the bank’s hardship agreement is structured, you may be able to report negative information to the credit bureaus during the grace period.

How to determine if you should negotiate your debt

If you have credit card debt that you want to settle with your credit card company, there are a few factors you should first consider. Explore other options first, such as B. Credit advice or bankruptcy. Each of them may be better suited to your specific situation.

If you're not several months behind on your payments, your credit card company may not be ready to pay off the debt, so you may need to consider other options. The credit card company also wants to make sure that you are financially able to afford any billing. This can be a lump sum or sufficient monthly cash flow to meet your billing obligations.

How do you negotiate credit card debt?

Dealing with credit card companies can be difficult, as many are likely to be reluctant to change their terms unless they fear filing for bankruptcy. Whether you negotiate credit card debt yourself or hire an expert to represent you, it's best to prepare for the negotiations. Start with the following steps:

  1. Confirm how much you owe. Before beginning credit card transactions, check your balance online or call your card issuer to find out your current balance. It's also a good idea to confirm the current interest rate on your account.
  2. Check your options. Decide whether a lump-sum settlement, an employment contract or a hardship agreement makes the most sense for your situation.
  3. Call your credit card issuer. If you've decided to handle the negotiations yourself, call your credit card company and ask to speak to their debt settlement, loss reduction or hardship department. A general customer service representative does not have the authority to approve your request. Once you are connected to someone who can negotiate with you, explain your situation and make your offer. Be polite but firm.
  4. Describe your terms. If you're considering filing for bankruptcy or hiring a professional to help you with your debt, let your card issuer know and mention that you prefer to settle things directly. At this point, be prepared for your card issuer to freeze your credit limit or close your account.
  5. TTake detailed notes and follow up as needed. You can record the call if you wish, although some states require that you notify your card issuer that you are recording the call and vice versa. Don't be afraid to ask to speak to a supervisor several times over the next few days and weeks, or to call back if you are not satisfied with the terms offered.
  6. Get the agreement in writing. If the card issuer accepts a deal or arrangement that you are happy with, request documentation. You don't have an agreement until you have it in writing.

How to get help with credit card debt

If you have credit card debt, it can help to have a professional work on your behalf. Generally, there are two types of companies that can deal with credit card companies for you: debt settlement companies and debt counselors.

debt settlement company

debt settlement companyThese are for-profit companies trying to negotiate flat-rate deals with their creditors. Typically, you stop making payments to your creditors and start sending money 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 you an offer to pay off the debt for less than what you owe. If the bank accepts the offer, the debt settlement company transfers the money to your creditor and you receive part of the services rendered.

Debt settlement companies can save you time and money, but there are potential problems with this approach. First, when you stop paying your credit card company, they will report the late payments to the credit bureaus. The account may eventually be debited, sold to a collection agency, or worse. All of these actions can have serious consequences when it comes to your credit score. There is also no guarantee that your bank will be ready to do business.

You should also keep in mind that debt settlement companies don't come cheap. These companies typically charge a percentage of the amount they save when they negotiate a debt. You could end up paying thousands of dollars for debt settlement services.

Credit Advisory Firm

ANDcredit counseling centercan help you negotiate credit card debt in an arrangement known as a debt management plan. Adebt management plan, or DMP, can help you consolidate your debt and lower your interest rates.

If you meet with a credit advisor and determine that a DMP is appropriate for your situation, the credit advisor will contact your lenders (e.g., credit card issuers) to try to negotiate a more favorable payment arrangement. If the credit counselor is successful, you'll begin paying a single monthly payment to the credit counseling firm, which in turn will distribute smaller payments to the creditors listed on your DMP. In general, a DMP can help you pay off your outstanding debt in five years or less.

Although credit counseling firms are generally not-for-profit organizations, their services are not free. Many credit counseling firms charge upfront fees and monthly fees (typically $25 to $35) when you sign up with a DMP. Depending on how long it takes you to pay off your debt, even these small fees can add up to thousands of dollars.

How does paying off credit card debt affect your credit score?

If you work with a debt settlement company, the company may advise you to stop making payments on your debt during the negotiation process. This can cause your debt to default, which your creditors will report to the credit bureaus. Bad debts stay on your credit report for seven years, which means you can have negative repercussions even after you've paid off the debt.

Debt settlement can tooaffect your creditworthinessif it affects your credit usage. If you default on your debt, your balance may increase due to additional fees and late fees. If you use too much of your available credit and don't pay off the debt, your score will drop as you pay off that debt.

Alternatives to credit card debt settlement

Paying off debt is the right choice for some people, but remember that it lowers your credit score and makes it harder for you to borrow money in the future. Even if you qualify for a future loan, your interest rates will be much higher than if you had excellent credit. If you want to avoid paying off a debt, you have other options.

Credit card balance transfer

If you have a lot of credit card debt, look for deals at a0% APR Credit card balance transfer. Terms vary by offer and card issuer, but you can usually find a 0% APR period that lasts between 12 and 20 months.

This allows you to transfer your credit card balance and cash out in a matter of months without incurring APR fees. But not all balance transfers exceed the full amount, meaning you'll have to make payments with both your new and old card. You'll also likely have to make a minimum payment each month, even if you don't use the card and it doesn't have an APR.

Debt Consolidation Loan

If you have many different types of debt or a lot of credit card debt: aDebt Consolidation LoanIt can help. This allows you to withdraw a lump sum, pay off all of your outstanding debt, and make a monthly payment on your new loan.

Debt consolidation loans typically have lower interest rates than credit cards, which helps you pay off your credit card debt without incurring even more interest. However, the calculated interest rate depends on your creditworthiness. Before you apply for a debt consolidation loan, research a few lenders to see which one offers the best deal and terms.

the bottom line

Negotiating your credit card can seem overwhelming, but trying to avoid the problem will only make it worse. The truth is that you have many options to reduce your debt. Whether you negotiate your credit card payment yourself or work with a professional, it's important to weigh your options carefully and be prepared when it comes time to call your credit card company.

Learn more:

  • How paying off debt affects your credit score
  • The best ways to get rid of credit card debt
  • How to get rid of credit card debt
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Author: Foster Heidenreich CPA

Last Updated: 04/19/2023

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