How to Negotiate Credit Card Debt

Woman with credit card, phone and laptop

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If you're facing financial challenges that are making it seem impossible to pay off your credit card debt, then negotiating with your creditor to reach a settlement agreement may be an option to consider. And you don't necessarily need to hire a debt settlement company to do it—you can negotiate a deal on your own if you approach it with some knowledge and determination.

Understand Why Credit Card Companies Negotiate

If you're going to try and negotiate with a credit card company, then you should know what often motivates them to do so. Credit card companies, many of which are owned by banks, have several priorities. The first is to generate profit for the parent company and its shareholders.

When it becomes evident that someone may be unable to pay his or her balance, a shift in the credit card company's priorities happens that can work to your advantage. The bank or credit card company becomes concerned with getting as much of the balance back from you as possible and closing or restricting your account. This allows them to avoid charging off the entire amount on their income statement, which would cause their stock to fall, management to get lower bonuses, and perhaps even dividend payments to shareholders to be reduced.

Absent some sort of unique set of circumstances, a bankruptcy filing would be the worst-case scenario for the credit card company because it stands to lose everything it has extended you. It means that they may be willing to forgive a large portion of the debt balance in hopes of getting back something rather than nothing.

Know Your Negotiation Options

Before negotiating with a credit card company on your own, you should get familiar with the types of settlement options that are typically available to consumers. If the credit card company is willing to entertain the idea of a debt settlement, then the odds are high that they will want to make one of the following arrangements.

Lump-Sum Payment Agreement

In this instance, you negotiate with the credit card company to pay a lump sum of money that is less than what you owe. Of course, this option only works if you have the cash available to make such a payment. If you receive a bonus at work, an inheritance, or are willing to raid your savings, then you can use it to offer a one-time payment in exchange for forgiveness of the entire remaining balance. 

Workout Agreement

For this option, the credit card company may be willing to lower your interest rate, waive or reduce the minimum monthly payment, and/or remove late fees in an agreed-upon plan. Often, this option can help you reduce your overall debt and help you pay it off in a shorter period of time.

Hardship Payment Agreement

This may be a good option for you if the reason you're having trouble paying credit card debt is due to illness, job loss, natural disaster, or another temporary hardship. You may be able to arrange for lower minimum payments, interest rates, and fees, and you may be able to suspend payments without penalty for a limited period of time. Not every credit card company will offer such an option, but it doesn't hurt to ask.

Be Persistent and Document Everything

If you want to negotiate with a credit card company, the process usually begins with a phone call. However, it may require long conversations with multiple people over days or weeks.

Before you call, make sure you know exactly how much you owe, what your interest rate is, and any other important account details.

Ordinarily, you'll need to explain that you're hoping to work out a credit card debt negotiation so that you can make sure the credit card company gets some of its money back, even if it's not the full amount, which is better than nothing. If you're considering filing for bankruptcy, then also let the company know that and tell them that you'd rather negotiate your debt repayment instead.

Don't give up if the first discussion doesn't go the way you'd like it to go. These negotiations often happen over time. Be sure to document the details of every conversation you have and who you're having it with.

If you do strike a deal, then be sure to get the terms of the settlement in writing to avoid future headaches and protect yourself.

As an alternative to pursuing a debt settlement with your credit card issuers, you could speak to a nonprofit credit counseling organization. These offer certified counselors trained in consumer credit, money and debt management, and budgeting. They help individuals create personalized plans to solve their debt problems and offer solid financial planning advice.

In addition, you might consider seeking the assistance from a debt relief program. Pursuing debt settlement is a last resort because it involves stopping payments and working with a firm that holds that money in escrow while negotiating with your creditors to reach a settlement, which can take up to four years. Withholding payments from your creditors can seriously damage your credit score.

Be Aware of Possible Disadvantages

Negotiating a credit card debt settlement can have some downsides that you should be aware of before making a decision to do it.

Depending on how it plays out, negotiating a credit card debt settlement can significantly lower your credit score.

Even before you enter into an agreement, companies may close your account or prevent you from using the credit line any further. The process can also temporarily lower your access to capital from other borrowing sources as you are now seen as a bigger risk. 

Other lenders may charge you higher interest rates to compensate for your heightened default probability. In some states, your insurance costs for things like automobile insurance might rise. The length and severity of these outcomes will be far worse with a bankruptcy filing, so it can still be worth it to go through with the settlement.

It's also important to note that forgiven credit card debt can be treated as taxable income. If the total debt forgiven is $600 or more, the lender is going to give you a Form 1099-C, Cancellation of Debt to use in your personal tax filing. Do not try to avoid claiming this as the IRS is going to be notified of it by the lender.

There's also a possibility that your credit card company may not be willing to entertain or negotiate a credit card debt settlement. If this happens, it's time to consider discussing your options with a bankruptcy attorney. In some situations, it's far easier to rebuild your personal balance sheet after having your liabilities discharged by a judge.

Frequently Asked Questions (FAQs)

What happens to credit card debt when you die?

Credit card debt is paid off by your estate after you die. In other words, the debt will be subtracted from anything you intend to pass onto heirs. Your estate executor will use estate assets to pay down the debt. After your debts are settled, your remaining assets will be passed onto heirs.

How do you consolidate credit card debt?

There are many ways you can consolidate credit card debt. The key is to get a single debt instrument that you can transfer all of your existing debt into. This could be a personal loan, a home equity loan, or even another credit card known as a "balance transfer card."

What is the average credit card debt in the U.S.?

According to the Federal Reserve's latest consumer credit report, there is about $15 billion in credit card debt in the U.S. When you divide that debt by the total number of adults in the U.S. (roughly 234 million) then you get an average of $64 in debt per person.