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.

A recent report from the New York Federal Reserve shows that credit card debt in America is over $986 billion, and the average American credit card debt is $5,910 per person. Credit card debt can cause a lot of financial stress, and it can harm your credit, making it difficult to get to a financially healthy place.

Many Americans don’t realize that credit card debt is negotiable. It is likely you can settle your debt for a lesser amount.

Today, you’ll learn various strategies for settling credit card debt, the different types of settlements and the pros and cons of settling your debt. After negotiating your credit card debt, you will have less debt, and you credit may improve.

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

The primary benefit of negotiating your credit card debt is to pay off your entire balance for a lower price. Over time, credit card debt gets higher than the price of your original purchases due to interest, so settling the debt for less can save you some money while helping you get out of debt.

You can negotiate credit card debt on your own or use a debt settlement company. There are good and bad debt settlement companies, so it’s helpful to know what to look for. For example, some debt settlement companies may advise you to stop making minimum payments. This can lead to penalty APR and more debt.

Another consideration is that some credit card companies don’t work with debt settlement companies, so it may be best in some situations to settle your debt on your own.

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?

In short, a credit card debt settlement allows you to pay off your credit card balance for less than what you owe. Sometimes, people use a debt settlement company to manage the negotiations, but many people do it on their own. Should you use a debt settlement company, there are typically fees for the service.

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

If you have a good payment history but have run into financial hardships, this agreement is for those with temporary financial issues. For example, this may qualify you for a hardship agreement if you lost your job, have medical issues or an injury or have another unforeseen emergency.

This type of agreement may suspend late fees and lower your interest rate for a certain amount of time. Overall, this may lower your minimum monthly payment. In some cases, the card issuer may also let you skip payments.

Before entering this agreement, try to negotiate that any missed payments won’t be reported on your credit report. Although card companies may allow you to miss payments, they can still get reported to the credit bureaus.

Workout agreement

Rather than settling your debt for a lesser amount, the card issuer may offer a workout agreement to lower or temporarily waive your interest rate. They may also waive late fees. This makes it a little easier to make payments and keep your debt from getting too high.

In some instances, the credit card company may close your account as part of this agreement, which can harm your credit. Closing the account lowers your overall credit limit, which usually harms your credit utilization ratio, and credit utilization is 30 percent of your overall FICO^® credit score.

Lump sum agreement

Lump sum agreements are what people often think of when discussing debt settlement because this is when you settle your debts for less with one payment. This agreement allows you to pay off your total balance for a lower amount, which can be quite helpful.

For example, you may owe $6,000, including your credit card purchases, interest fees and other credit card fees. With a lump sum agreement, you may ask if you can settle the entire debt that day for $4,000 or even $3,000, thus potentially saving you thousands.

Remember, this is a negotiation. You may make an offer, and they may make a counteroffer. Find a number that works out for both you and the credit card company. Then be sure to get the agreement in writing.

4 alternatives to credit card debt settlement

Credit card debt settlement has pros and cons, and you may benefit from using alternative methods instead. The following are some alternatives to try before settling your debt with the credit card company:

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.

Additional help for credit card debt settlement

Many go the DIY route for settling their debt, but if the process seems like something you would rather outsource, there are other options.

• Debt settlement companies: In most cases, debt settlement companies try to get you into a lump sum agreement, and they do this for a fee. When you work with one of these companies, rather than sending your credit card company your payments, you send the payments to the debt settlement company instead.
• Credit counseling: Credit counseling companies are often nonprofit organizations designed to help you with your debt while also helping you with your financial management. Although they’re nonprofits, they often have an affordable monthly fee. They can help you negotiate your debt or put you on a debt management plan to consolidate your debt and possibly get you a lower interest rate.

One thing to note is that the Federal Trade Commission (FTC) warns of risks associated with debt settlement companies. The FTC states, “Debt settlement programs can be risky. If a company can’t get your creditors to agree to settle your debts, you could owe even more money in the end in late fees and interest. Even if a debt settlement company does get your creditors to agree, you still must be able to make payments long enough to get them settled.”

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: Articles have only been reviewed by the indicated attorney, not written by them. 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.