How to negotiate credit card debt

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Credit card debt is a growing concern for Americans. A report from the New York Federal Reserve shows that national credit card debt reached $1.13 trillion at the end of 2023. The average American has about $6,501 in personal credit card debt, a balance most people can’t easily pay off in full. 

Having credit card debt is stressful and can harm your credit health, making it difficult to reach your financial goals, like buying a house or new car. However, it’s also negotiable, and you may be able to settle your debt for a more manageable amount. Let’s explore how to negotiate credit card debt, what settlement options exist and how settling your debt can impact your financial situation. 

How to negotiate credit card debt yourself

When negotiating your credit card debt, you’re asking the creditor to take a lesser amount than the total you owe. It’s helpful to keep this in mind as you go through this do-it-yourself method to improve your chances of the creditor agreeing to the settlement.

1. Find out how much you owe: One of the best things you can do is fully prepare before calling the credit card company. That starts with knowing how much you owe. This will also ensure there are no errors on your credit card statements for late or missed payments.
2. Learn why credit card companies settle debt: Understanding why credit card companies settle credit card debts will help with your negotiations. Sometimes, they’ll negotiate if you’re going through financial hardships, or they simply feel that receiving some payment is better than none.
3. Decide which type of debt settlement is best for you: There are three primary types of settlement agreements and knowing which one is best for you will help you as you enter the negotiation process.
4. Contact the credit card company: Once the research is complete, you should call your credit card company to negotiate the debt. You can send a letter, but making the phone call is a bit more personal and may help you settle your debt.
5. Agree to terms that fit your needs: This is a negotiation, so you should only agree to the terms if they suit your needs.
6. Take detailed notes: Whenever you talk to a credit card company, especially when you’re settling a debt, it’s beneficial to take notes just in case you need to follow up. Note the date and time you called, who you spoke with and the details of the agreement.
7. Send a pay for delete letter if needed: If you’d like to get a negative item like a late or missed payment removed from your credit report, send a pay for delete letter to discuss the possibility of the negative item being removed in exchange for payment.
8. Get documentation for the agreement: After you reach an agreement, ask for the agreement in writing. You can request that the credit card company send you something in the mail or via email.

Why you should negotiate credit card debt

Negotiating credit card debt can result in settling for a lower amount than what you owe. This can save you money while helping you alleviate debt. Not every credit card company will agree to negotiate, but yours may be willing to if you’ve been a loyal customer until this recent hardship. 

When struggling financially, people commonly let their credit card payments slide. Credit card debt works differently from other types of debt, such as mortgage or auto loans. If you don’t pay a loan, you risk losing your car or house. However, credit card debt is unsecured and doesn’t carry the same consequences. 

This doesn’t mean not paying credit card debt is harmless. Failing to make payments can damage your credit or cause your account to default. Once an account becomes delinquent for too long, credit card companies try selling it to a collection agency for a lower amount. Most companies figure getting some money is better than none, but they may be willing to negotiate the debt with you if they’ll receive a higher amount than they would by selling it.

Why credit card companies negotiate debt

The primary reason credit card companies are willing to negotiate credit card debt is because it’s better to receive payment than to not receive it. Once an account becomes delinquent for too long, credit card companies see it as a loss and sell the debt to an outside collection agency for a lower amount. By negotiating with you, the debt holder, they may receive more than they would by selling the debt to a collection agency.

This doesn’t mean that you should purposely fall behind on your credit card bills, though. Missed and late payments can result in derogatory marks, harming your credit.

The credit card companies may also be willing to negotiate your debt if you’re a loyal customer. If you have a good history with the credit card company but have fallen on hard times, the company may settle your debt to maintain the relationship.

How do credit card debt settlements work?

Credit card debt settlements refer to changes in your account terms or repayment amount. There are three primary types of settlements that credit card companies may agree to: hardship agreements, workout agreements and lump-sum agreements. 

3 types of credit card debt settlement

Credit card companies most frequently use three primary types of credit card debt settlement. Understanding each one can help you prepare before you call to negotiate.

Hardship agreement

Also referred to as a forbearance program, a hardship agreement provides temporary relief to borrowers experiencing financial hardship from job loss, medical issues or other unforeseen circumstances. Your card issuer may suspend late fees, lower your interest rate or temporarily reduce your monthly payment. 

However, you’ll still owe your total outstanding balance. Additionally, your card issuer may report negative information, like missed payments, to credit bureaus during the forbearance period, depending on the bank’s policies. 

Workout agreement

With a workout agreement, your card issuer can reduce or temporarily waive your interest rate. The bank may also agree to other solutions, including waiving past late fees or reducing your monthly payment. However, it may close your account as part of the agreement, which can hurt your credit score. 

Closing the account decreases your available credit limit, which can negatively affect  your credit utilization ratio. This factor accounts for 30 percent of your overall FICO® score. 

Lump sum agreement

A lump-sum agreement allows you to pay your outstanding balance in full at a lower amount. For example, if you owe $5,000 in credit card debt, you can ask to settle the debt that day for a lesser amount of $4,000 or $3,000, potentially saving thousands. 

After making an offer, your card issuer may suggest a counteroffer. Negotiate until you settle on a number that works for both parties, and ask for a written agreement. 

4 alternatives to credit card debt settlement

Negotiating credit card debt can have numerous benefits, including paying less than what you owe, paying off your debt faster and receiving lower payments or interest rates. However, it can also have some drawbacks. For example, settling your debt can hurt your credit or require you to pay taxes on the amount you saved.

The IRS counts settlement savings of $600 or more as income. If this happens, you’ll receive a 1099-C Cancellation of Debt form from your creditor. To avoid this risk, consider alternative methods of managing your debt, including:

1. Balance transfer cards: Balance transfer cards allow you to move balances from multiple credit card accounts to one. This can help simplify your debt payments, and sometimes, you can get a much better interest rate.
2. Debt consolidation loans: Much like a balance transfer card, a debt consolidation loan allows you to get a loan to pay off your credit card debts. After that, you have one loan to pay back rather than paying multiple credit card payments.
3. Find additional sources of income: For some, the best option is to find additional sources of income through selling old items they no longer need or working extra hours at their current job to pay down their debt.
4. Borrow from friends or family: If possible, borrowing from a friend or family member to pay off your debt may be the ideal solution because they often won’t charge you interest, unlike a credit card company. However, if you choose this option, expectations are set for all parties involved so you can preserve the relationship.

What to do if you need help negotiating your credit card debt

Many people choose to negotiate credit card debt on their own, but some seek professional help if the process seems too overwhelming. There are two main types of companies to consider:

• Debt settlement: These for-profit businesses try to negotiate lump-sum agreements with credit card companies. When you work with one of these companies, you usually start sending payments to it rather than your card issuer. The debt settlement company then negotiates with your card issuer to lower your debt amount.
• Credit counseling: These nonprofit agencies work with you and your creditors to determine a debt management plan. This can help you consolidate your debt and potentially access a lower interest rate. Although credit counseling agencies are nonprofits, they often charge a low monthly fee for their services. 

Be aware that working with a debt settlement company comes with some risks. For starters, some credit issuers may refuse to work with the company. Additionally, the Federal Trade Commission warns that you may owe more money in accrued late fees and interest if the settlement company isn’t able to reach a deal with your card issuer. These companies also aren’t cheap and typically charge a percentage of the money they save you, which could equal thousands of dollars. 

The pros and cons of credit card debt settlement

Now that you know about negotiating credit card debt as well as the alternatives, you may be wondering if settling your debt is right for you. Let’s go over some pros and cons to help you make the right choice based on your current situation.

Pros:

• Paying off your debt for less than what you owe,
• Settling your debt may help you get out of debt faster, and
• You may receive more manageable payments or lower interest rates, depending on the type of settlement agreement

Cons:

• The credit card company may deny the settlement agreement,
• Settling your debt may hurt your credit, and
• You may have to pay taxes on the difference of the settlement.

The IRS requires you to report any debt settlement savings of $600 or more as income. For example, if you owed $5,000 in credit card debt and settled the debt for $3,000, the $2,000 saved must be reported as taxable income. You will receive a 1099-C, Cancellation of Debt from the creditor.

Has credit card debt harmed your credit?

If you’re struggling with your finances due to significant debt, which has damaged your credit, you’re not alone. Significant debt can result in increased interest rates and higher down payments when you rent or set up certain services or utilities, but help is available.

Lexington Law Firm is a credit repair company that has a team of legal consultants who work with you to address errors on your credit report. Sign up for your free credit assessment today to see if Lexington Law Firm could help you with your credit.

Note: The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.