How to Negotiate Credit Card Debt in Three Easy Steps

How to Negotiate Credit Card Debt in Three Easy Steps Title Image

If you have credit card debt, you’re certainly not alone. In 2018, credit card debt in the United States reached an all-time high, with the average household owing more than $6,000.

If paying what you owe seems hopeless, you may need to negotiate with your credit card company. While this should be considered a last resort, in certain cases, it could help you get a handle on spiraling debts. 

Here are the three steps you should take when negotiating an agreement with your credit card company. We’ll also offer tips on how to talk with your credit card issuer and discuss how negotiating debt will impact your credit score. 

Step 1: Know What You Owe

It’s easy to lose track of what you owe on a credit card or on multiple credit cards. However, getting a clear picture is necessary for taking action.

The first thing you should do is check your most recent credit card statements or log in to your online account to get a clear idea of the running total of your debt. You can also check your credit report from each of the three bureaus to compare items and make sure that your credit history has been accurately reported. Keep in mind there are a few—although not many—cards that don’t report to all three bureaus, and there may be items that appear on one credit report that are absent on the others. This is why we recommend checking all three.

Once you have a clear idea of your current debt, you can realistically assess your ability to repay it. Additionally, there are tools and resources available that will help you stay organized, like this free online credit card calculator at Credit.com. You can estimate how long it’ll take you to pay off your credit cards at specific interest rates.

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Step 2: Call the Credit Card Company

Once you’ve worked out how much you owe, who you owe and when your debt payments are due, it’s time to call your credit card company. At this point in time you want to gauge how helpful your credit card company will be and how likely they are to work with you. Some companies are more forgiving than others, and it may take more than one conversation to scope out your options and establish a plan.

Calling and negotiating can be a difficult process—here are some ways you can prepare for the call.

Seven Tips for Negotiating Credit Card Debt on a Phone Call

  1. Before the call, decide how much you’re prepared to pay and don’t let yourself be persuaded into paying more than you can afford.
  2. Have a notebook or computer available to record important details from the conversation.
  3. Have a list of all your debts in front of you so you can communicate the full extent of your debt.
  4. Document the phone call, and make sure you get the names and titles of the people you speak to.
  5. Don’t be afraid to ask for time to think about it.
  6. Get an agreement in writing immediately.
  7. Before you end the call, ask how the arrangement will be reported on your credit file.

Step 3: Research Potential Ways to Reduce Your Debt

If you have high levels of debt on credit cards, there may be ways to reduce these amounts.

Option 1: Forbearance

Forbearance is a temporary arrangement set for a number of months to refinance your loan (reduce the interest or monthly payment), waive late fees, or give you some “breathing space” where they don’t try to collect your debt. There is no guarantee that your credit card company will agree to a forbearance option.

Who is it for?

Forbearance may work if your financial situation is temporary and you’re confident that in a few months you’ll be able to go back to making regular payments.

PROS: Your account(s) will remain open, and you will have time to make payments under easier financial circumstances.

CONS: It’s only a temporary arrangement, and doesn’t reduce the overall debt you have (which you still need to pay back).

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Option 2: Workout Agreement

A workout agreement is an arrangement with the credit card company to adjust terms on a loan that’s in default. The company might reduce the interest rate, waive late fees, or reduce your monthly payment plan. 

Who is it for?

A workout agreement is a good solution if you can still make some monthly payments, but are finding that charges, late fees and interest are sending you spiraling into more debt. 

PROS: You won’t have to close your accounts, so if nothing else changes, there won’t be an impact on your credit score.

CONS: Your credit card(s) will be frozen while the agreement is in place.

Option 3: Lump-sum Settlement

Otherwise known as a full and final settlement, a lump-sum settlement is where the credit card company agrees to accept a payment which may be less than the full amount you owe. This option does have a significant impact on your credit score and should be considered a last resort before bankruptcy.

Who is it for?

A lump-sum settlement is an option to consider if you know your situation is not likely to improve. You’ll need savings, an inheritance, to borrow from a family member or friend, or some other source of a lump-sum of money to satisfy the amount needed for a lump-sum payment.

PROS: Your debt is settled quickly, and you won’t be overwhelmed by fees.

CONS: There are several significant downsides to a lump-sum settlement:

  1. The credit card company may not accept your offer for a lump-sum settlement, and the time you spend attempting to negotiate with them may cost you.
  2. It can take years to save enough money to make even the reduced amount of a lump-sum payment.
  3. Even after you settle your debt, the debt settlement will be listed on your credit report. Not only will this cause your overall score to drop, but it will be seen as a red flag by future lenders.
  4. Unless you qualify for an exclusion, the forgiven amount of your debt will be considered taxable income.
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Option 4: Debt Management

With debt management, you hand over your debts to a debt management company. Instead of paying each of your creditors, you make a single monthly payment to the company, who then pays your creditors. They negotiate reduced fees and interest on your behalf. 

Who is it for?

Debt management might be a good choice if you’re in severe debt, struggling to pay off many cards at different times of the month or if your accounts are with debt collection agencies.

PROS: For some, it can be easier to stay organized when you only have to make one payment.

CONS: Paying off your debt this way takes time. You’ll need to close all your cards when you hand your debt over to the debt management company, which can have a significant, negative impact on your credit score depending on the number of accounts you close. Make sure that the debt management company is appropriately licensed in your state, that it follows all federal and state laws, and has good reviews from previous customers. Do your homework thoroughly before handing your financial future to any third party.

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How Does Negotiating Credit Card Debt Affect Your Credit Score?

The action of negotiating itself will not impact a credit score, but there may be resulting actions There are disadvantages and risks in negotiating your debt. 

Here are some things to be aware of:

  • If your creditor defaults, your account will be visible on your credit report. Other lenders will be able to see the default, meaning you’re less likely to get credit in the future.
  • Once you contact your creditors to negotiate your debt, they may close your account(s). Closing accounts can reduce your credit score.
  • One of the consequences of a debt management plan might be a lower credit score, depending on how you are deviating from your original payment agreement.
  • Settling your debt is one of the worst ways to damage your credit score. A settled account will remain on your credit file for as long as seven years, and your score can reduce by more than 100 points in some cases.
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Credit Card Debt and Credit Repair

If you’re facing credit card debt, it’s important to do something about it. Doing nothing can ruin your credit score and make it impossible to get credit for many years—including loans and mortgages. However, if you take small steps to improve your credit over time, your credit score will rise. Small steps can include regularly scanning through your credit report, or taking the time to dispute unfair, negative items on your report.

Lexington Law’s team can help you review your credit report so you know where to start and what information you need to challenge items on your report that might not be accurately reported. Learn more about our credit repair services to see how we can help.