How Negotiating Credit Card Settlement Typically Work
You can possibly avoid further damage to your credit profile and get back on track by negotiating your credit card debt. This arrangement allows you to pay the credit card company a fraction of what you owe to settle your account.
Its possible to handle negotiations independently, but working with a debt settlement company could yield better results. More on that shortly.
Get Everything In Writing
Once youve found someone at the credit card company who is willing to negotiate, make sure you get the terms of the deal in writing.
The credit card manager you made a verbal agreement with may leave the company or your account may accidentally be sent to collections. Anything can happen, so protect yourself by putting it all on paper.
Take Taxes And Fees Into Account
When you make a decision regarding paying your debt in full or settling it, its important to keep the tax implication of settling in mind. You have to pay taxes on forgiven debt. If the forgiven amount is more than $600, you will receive a 1099-C Cancellation of Debt tax form from the creditor or collection agency with whom you settled.
The IRS requires that you report any amount of forgiveness for that tax year because its considered income. When added to your taxable income, the money you just saved via a settlement could cost more than anticipated. In addition to taxes, you may also have to pay fees to settle your debt. Its important to pay attention to these extra expenses because as your savings diminish, the value in settling diminishes as well.
If settlement is the only way you can afford to pay off your credit card debt, just make sure you set aside enough money to pay those extra taxes.
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Enter A Hardship Agreement Or Forbearance
Many credit card companies have hardship or forbearance programs available to people having trouble keeping up with their payments. Often, these programs are available after natural disasters, such as a hurricane. This has also been true during the COVID-19 pandemic. Some credit card companies have special hardship or forbearance programs for those affected financially by the pandemic.
To access these programs, call your credit card issuer and tell them what youâre struggling with thatâs preventing you from making your monthly payments. Examples of hardships include a medical hardship or a job loss or pay cut. Hardships also result from emergencies like the COVID-19 pandemic or a natural disaster, like a hurricane or storm.
How can a hardship program help me?
Hardship programs have many benefits, including:
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Waiving credit card account late fees
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Allowing you to delay making payments without reporting late payments to the major credit bureaus and/or
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Forgiving interest or an interest rate reduction.
These hardship programs arenât one-size-fits-all. Theyâre always determined by participating credit card issuers on a case-by-case basis. A credit card company does not have to let you into a hardship program. If youâre unsure what a hardship plan includes, make sure you ask the credit card company lots of questions before you agree to anything.
What are the downsides of hardship programs?
What Is Debt Settlement
Debt settlement refers to resolving debt by paying less than you owe. You can negotiate with creditors on your own, and there are also companies that settle with creditors on your behalf. Working with a debt settlement requires stopping payments on your debt and sending money to the settlement company instead. This will significantly lower your credit score until the settlement company starts settling your debt. Interest and fees also accumulate while the company settles the debt. Debt settlement companies also charge fees.
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Enroll In A Hardship Plan
If youve already missed payments on a bank credit card, that bank may have already reached out to you about reducing your monthly payments by enrolling you in a hardship plan. While not widely advertised, these programs lower your interest rate. They may also waive or eliminate fees and penalties. Also called assistance programs, hardship plans can be short-term or long term. On a long-term hardship payment plan , your account is canceled and your interest rate is frozen while you repay your debt.
What qualifies for a hardship plan? While hardship plans are generally negotiated on a case by case basis, usually a major life event that impacts your ability to pay will qualify you. Examples include unemployment, a serious illness, divorce or a natural disaster such as a fire, hurricane or flood.
Note that not all credit card issuers offer hardship plans. And even if they do, not all will provide specific information about their plans without talking to them directly. Discover seems to be the exception, offering information about its hardship programs on its website. If you want to see what kind of help you can get from your bank, call the number on the back of your card and ask a representative if they offer hardship plans. If they do, explain your situation honestly and tell them you want to pay what you owe but that youre struggling right now.
Add Up Your Credit Card Debt
Depending on your situation, you may need to try to negotiate with one or more credit card companies. Take stock of your credit card debt by logging in to your online accounts and tallying up your current balances.
You may also want to note your monthly payments and interest rates, as this can help you determine which credit card companies to try to negotiate with first. Focus on the cards that are giving you the most grief due to a high monthly payment or interest rate.
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The Phone Call Might Take Awhile
You might even want to practice the call beforehand, rehearsing what you’ll say and how you’ll say it. Of course, this technique may not work every single time, depending on your payment history and other factors. but if you’re firm and insist upon getting what you called for, you’ll find that it works quite often.
You should understand this phone call might be a long one because they will put you on hold multiple times and even try to sell you other products or addons to your account.
Resist their sales pitches!
How To Negotiate With Your Credit Card Company
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So youre wondering if you can negotiate with your credit card company? The short answer: it depends.
Credit card companies may negotiate on some things , due dates and even minimum payments. But other things like special offer terms arent really negotiable. The key is understanding what you can negotiate on, as well as how to negotiate.
What can you negotiate?
Payment due date. Your due date is typically automatically set when you get approved for your card. But if a particular payment date isnt working well for you, ask to get it changed. Some credit card companies are so flexible about this that you can just change your due date online.
Interest rate. Lets say youve had a credit card for a few years. When you first signed up, you had mediocre credit. Now, you have much better credit, a low balance, and youve made on-time payments for years.
The credit card company probably wont just hand you an interest rate reduction on a silver platter. But you can ask. And, chances are that if you mention that you found a better interest rate deal elsewhere, the company will reduce your interest rate to keep your business.
Annual fee. Annual fees are often waived for new customers, but getting an annual fee waived after youve been a cardholder for a few years may be a bit more difficult. That doesnt mean its not worth the effort though many issuers would rather keep you as a client and waive a fee than lose you.
How can you negotiate?
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How Does Credit Card Settlement Work
The benefits of credit card settlement are clear: You may be able to get out of debt more quickly without the responsibility of the full debt load. However, your credit score will likely drop as a result of debt settlement, and you may have tax consequences down the line. If you settle a $15,000 debt for $10,000, for instance, you may be taxed on that $5,000 difference.
Refunding International Transaction Fees
Some credit card companies will refund international transaction fees charged when you use your card while traveling internationally. These fees can quickly add up, so if you forgot to check your policy and get a surprise on your next statement when you return home, call and see if they will waive those fees.
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If Your Debt Has Gone To Collections
If your debt has been turned over to collections you may have a little more bargaining power working in your favor. By the time a debt gets to collections, they realize they’re not likely to get much of that money back.
If this is the case, you can offer them much less than what you actually owe, and they may take you up on the offer.
This can work especially well if your outstanding debt has been sold to an outside collections company. These companies typically buy bad debt for pennies on the dollar.
You could start your negotiations by offering them 25-30 cents on the dollar and work up from there. However, you should be willing to pay the negotiated amount as a lump sum. Most will not let you work out a payment plan.
Settling Credit Card Debt Pays Off For Both Parties
Why would a credit card company let you off the hook for less than what you owe? It simply comes down to whether they want some of their money back versus none of it. Credit card debt is unsecured debt, meaning its not tied to an asset like a house or a car. So if a persons financial situation gets so dire that they file for bankruptcy, its possible a credit card company wont see any of the debt repaid.
Some people work with debt settlement companies to help them negotiate a settlement with credit card companies, but its also something you can do on your own. Debt settlement is not without its risks, however. Your credit could take a further hit and it could take years for it to recover, but its a definite option for debt relief. Heres what you need to know:
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How Do You Repair Your Credit After Debt Settlement
Debt settlement stays on your credit report for seven years, starting on the first date of your delinquency. In order to repair your credit after a settlement, it is important to not go over your credit limit, pay your bills on time, and make sure your debt to credit utilization ratio stays in balance.
Tips For Negotiating Credit Card Debt
So if you’ve decided it’s time to get out of debt and you want get rid of your credit cards for good, here are some excellent tips on how to negotiate credit card debt and get it to a more manageable level. Not every tip will work every single time, but the more you use them the more likely they are to be successful!
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If Your Monthly Credit Card Payment Rivals Your Mortgage Or Rent Or If High Interest Rates Are Making It Impossible For You To Get Rid Of The Debt It Might Be Time To Negotiate With Your Credit Card Company
On average, people hold around $3,100 in credit card debt, according to a 2019 Credit Karma analysis. And with a median household income of $61,937, according to 2018 Census Bureau data, most Americans likely use a substantial portion of their earnings to pay down consumer debt.
But when this debt becomes an unbearable financial burden, what can you do? One option may be to try to negotiate with your credit card company.
Credit card companies are about collecting the money. Theyre going to size this up and if they say, This is a person who sounds like a good risk and is likely to eventually repay this bill, then theyre likely to make concessions, says Mike Sullivan, a personal finance consultant with Take Charge America, a national nonprofit credit counseling agency.
If youre drowning in credit card debt, it may take a phone call to your credit card company to devise a workable solution. Dont know where to start? Heres a guide for how to negotiate with your credit card company.
Be Willing To Transfer Your Balance
If you tell them you’ll transfer your balance if they don’t help you out, you should be willing to live up to your word. Don’t be afraid to do business with someone else if you don’t get what you want.
You can almost always get a better deal when you float your balance to another card at another company. This is where those credit card offers you got in the mail come in handy.
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If Youre Struggling To Keep Up With Your Credit Card Payments You May Be Able To Negotiate Your Credit Card Debt Down To A Smaller Amount
If youre drowning in credit card debt, you might be able to settle with your creditors for less than you owe. Learn how to negotiate credit card debt.
Theres no doubt about it Americans love their . More specifically, they love using those credit cards.
The average consumer carried just over $5,200 in credit card debt in 2021, with credit card debt in the U.S. totaling $784.5 billion, according to Experian data.
With high credit card debt often creating a significant household financial burden, what can credit card owners do to alleviate that debt? One option is to negotiate your credit card debt down to less than you currently owe.
Here are some different options for negotiating credit card debt, as well as other solutions for managing your debt.
Consolidating high-interest debt with a personal loan is one way to manage credit card debt. Credible makes it easy to see your prequalified personal loan rates from various lenders.
Options For Negotiating Debt Settlements And Agreements
Keep in mind that negotiating your credit card debt will likely have a negative effect on your credit. But any credit hit you take from credit card negotiation will probably be less damaging or lasting than other options, like default or bankruptcy.
You have three main options for negotiating credit card debt. The one thats best for you will depend on your unique financial situation.
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Identify And Avoid Spending Triggers
As you work toward paying off debt, think about what behaviors got you there in the first place. Did you rack up charges because you couldnt resist a sale, or give in to FOMO by trying to keep up with a lifestyle you couldnt afford?
Identifying what caused you to overspend can help you come up with a plan to avoid those situations and the temptation to spend in the future and keep debt at bay as you build a more secure financial future.
Figure Out What You Can Afford To Pay
Paying off your debt is important, particularly if it’s keeping you from improving your credit or getting approved for other credit cards and loans.
Before you offer a payment to the debt collector, consider your other financial obligations. Take a look at your budgeted income and expenses to figure out what you can afford to pay toward the debt.
Consider whether you can pay it all in a single lump sum or break it into a few payments. Keep in mind, debt collectors will want to collect as much as they can as quickly as they can, so spreading your payments over more than a few months likely won’t be an option.
You may, for example, offer to pay a lump sum of $3,000 on a $5,000 debt. You’ll ask that the debt collector honor your payment as full satisfaction of the debt, which means the collector cancels the remaining $2,000. Or, you might offer to make four monthly payments of $1,250 to completely pay off the debt.
Make sure you can afford to pay what you’ve offered. Once the debt collector accepts, you may only have a small window to make the payment. This process is known as debt settlement.
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Set A Budget And Monitor Spending
While tracking expenses can be done on paper or with an Excel spreadsheet, several apps make this process effortless by doing the work for you.
For example, Mint links all your financial accounts in one place, categorizing your spending so you can check in to see whether youre on track. You can even set budget alerts that hold you accountable for your spending limits. Other options include You Need A Budget and PocketGuard.
Some Real Examples Of What Debt Negotiators Can Do For You
Debt.com works with a network of debt relief providers, including the two types of professional debt negotiators that we described. So, lets look at two examples of real people that worked with a professional debt negotiation team. Both people had similar amounts of debt, but different needs and goals.
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