Are you having trouble keeping up with credit card payments? Do you wonder if you’ll ever pay off your balances? (See also: Fastest Way to Pay Off 10K in Credit Card Debt)
Perhaps you’ve heard you can negotiate and settle your credit card debt. But how does that work? Do you need professional help or can you manage it all on your own?
Learn about four ways to negotiate and settle credit card debt.
1. Enter a Credit Card Hardship Program
If your debt woes are attributable to a significant change in your life’s circumstances, you may be able to qualify for a hardship repayment or forbearance program.
Donna Holmes, financial counselor with SAFE Federal Credit Union says, “Financial hardship can be caused by several unfortunate life events, such as a divorce, job loss, furloughs, layoffs, moving, or a death of a loved one. Positive events such as the birth of a child can also create financial hardships at times too, especially if there are unexpected medical complications.”
In addition, “simply being financially overextended” could classify you as experiencing hardship, says Thomas Nitzsche, credit educator with Clearpoint, a nonprofit agency that provides credit counseling.
Entering a hardship program could give you a lower APR and fee reductions. Nitzsche says “With credit card hardship programs, you are typically given a reduced interest rate at a fixed payment and term.” As a result, you may pay less in interest. In addition, you may be able to get fees waived.
To pursue this course of action, Holmes says to ask your lender if it has a program to assist with financial hardship. In addition, you may be able to locate your card issuer’s hardship department on your card company’s website or your monthly statement.
2. Negotiate a Modified Payment Plan
The types of programs available to a credit card borrower in trouble may vary by personal situation and financial institution. If you’re unable to qualify for a hardship program, you may be able to negotiate a modified payment plan or work out an arrangement with your credit card company.
Such a plan could reduce your monthly payment. A lower monthly payment could enable you to make payments on time without becoming overextended in other areas.
Before making a call, consider reviewing your finances, developing a budget, and determining how much you can pay monthly on your card balance. You may be able to prepare yourself to negotiate a lower monthly payment along with possible concessions, such as fee waivers similar to those available through a hardship program.
Find the phone number to call on your credit card or card statement. Be aware that you may need to make several calls before finding a representative or manager who is agreeable and authorized to assist you.
With a modified payment program, Holmes says that sometimes the rate is increased “even though the payment has been reduced.” Nitzsche says a delinquent amount may be tacked onto the balance or the repayment period. As a result, though a modified payment may mesh better with your budget, you could pay more overall, depending on how the deal is structured.
3. Settle Debts for Less Than You Owe
Debt settlement involves offering a lump-sum payment to receive forgiveness of your outstanding credit card balances.
With this approach, you offer this lump-sum to the card company in exchange for erasing or settling your debt. Building this balance may involve setting aside money in a dedicated savings account over a long period of time; selling items that you no longer need, or using a windfall from an employment bonus, tax refund, inheritance, or other source.
To explore the possibility of settling debt, you may plead your case to your credit card company on your own, or you might hire a debt settlement company to negotiate on your behalf. The FTC offers guidelines on choosing a debt settlement company.
If you work with a debt settlement company, you may be asked to stop making credit card payments and default on your debt. This process could allow you to accumulate funds and, at the same time, induce the card company to accept a settlement.
Generally, your debt must have been charged off as a loss before you can negotiate a settlement with your credit card company. Nitzsche says that creditors are not motivated to cut a deal if they are still receiving a minimum monthly payment.
However, defaulting on credit card debt can cause problems. Failing to make payments could have a negative impact on your credit report, lead to calls from creditors and debt collectors, and result in late fees and penalties that increase your indebtedness.
Nitzsche says an exception to getting a settlement only after debt has been written off may occur “if you can prove to the creditor that you are at a high risk of default, but have a lump sum available to settle the debt for less than is owed.” For example, if you have a severance check from a recent layoff, you may be able to settle without going into default.
4. Enroll in a Debt Management Plan
Credit counseling agencies offer debt management plans (DMPs) to help consumers pay off credit card balances. With a DMP, you make monthly payments to the counseling organization, which in turn pays your credit card bills. The agency may also negotiate more favorable terms such as a lower APR, more manageable payment schedule, or fee waivers with your credit card issuer.
A certified credit counselor should review your financial situation and offer customized money-management advice before enrolling you in a DMP. For example, Nitzsche says Clearpoint identifies and addresses reasons for financial difficulties first. Counselors may help clients create a household budget, outline financial goals, and address financial concerns in addition to developing a DMP to deal with debt.
Consider examining the DMP to make sure you understand and agree to its details. You may want to confirm that credit card payments are scheduled according to your due dates in order to avoid late fees. Nitzsche says you can contact creditors to adjust due dates if needed.
The FTC offers guidance on checking the credentials of credit counseling agencies and verifying that a DMP may work for you. In addition, consider asking for a schedule of fees so you’ll know what services you may receive and how much they cost.
Consider getting documentation of any deals in writing. In this way, you’ll be able to confirm your understanding of agreements.
The Downsides of Negotiating and Settling Credit Card Debt
Having a plan to eliminate credit card debt can be rewarding. But there can be downsides to negotiating and settling this debt. They may include:
- Your credit card accounts may be closed. As a result, you won’t be able to continue using your cards.
- Your credit score may drop. This drop may result from increased credit utilization or other reasons.
- You may owe taxes on debt that’s forgiven.
- You may pay more than originally scheduled. While you could save money on fees and interest, there’s also the possibility that you’ll pay more interest over a longer time frame.
- You could incur costs from fees to companies that help you with debt management and debt settlement. These expenses could increase your debt load, rather than eliminating balances.
If you’re overwhelmed by credit card debt, negotiating a new agreement or settling your balances for less than you owe may sound attractive. Determine the best course of action by evaluating your finances on your own or finding qualified counselors who can help you. Understand the benefits and consequences of negotiating or settling your debt before getting started.