If you haven’t been paying off your credit cards in full every month, you’re not alone. According to the Federal Reserve Bank of New York, U.S. household credit card debt increased by $100 billion between the second quarter of 2021 and the second quarter of 2022.
Depending on how much debt you have, you might not feel confident about getting out from under it. However, learning how to negotiate credit card debt can provide you with a way to get relief.
Why Should You Negotiate Credit Card Debt?
Negotiating can help you get out of debt faster. However, you won’t always succeed, and negotiating shouldn’t be your first course of action.
Consumers often consider negotiation after their debt goes to a collection agency or after the creditor hires a servicer to handle communication, says Daryl Holman Jr., founder of Revival, a debt elimination startup. “There are hardship plans that can come before this point, but what’s best for borrowers is to make their payments on time if they have the ability to do so.”
If you’re not able to make payments on time but your debt hasn’t yet gone to collections, negotiating with your credit card company is a much better option than ignoring the debt entirely.
“If you’ve got an account with a large balance that’s already delinquent, a chunk of money in the bank, and some negotiation skills, it may make sense to negotiate a (lump-sum) credit card debt settlement,” says Leslie Tayne, a financial attorney and managing director of Tayne Law Group in New York.
Understanding your options when negotiating credit card debt can help you work out a manageable agreement. Note that if you’ve had credit card debt go to a collection agency, you can negotiate with debt collectors.
What Are Your Options?
When negotiating with credit card companies, you can pursue lump-sum settlement, a hardship agreement or a workout agreement.
This option requires debtors to make one bulk payment upfront for a lower amount than the debt owed. Once creditors receive the lump-sum payouts, you can expect the account to be listed as settled in full on your credit report.
“A lump-sum settlement is the most advantageous route for you to take because you’ll generally get the best deal from your creditor,” Tayne says. “Plus, your debt will be gone.”
Keep in mind that settling your debt for less than you owe will harm your credit score, though settling is still better than having a charge-off on your credit report.
Hardship plans are also called forbearance and can provide temporary relief to borrowers in need. For example, your creditor might lower your minimum payment amount or interest rate or stop late fees, according to the credit bureau Experian. However, unlike with a lump-sum settlement, you’ll still owe back your total outstanding balance. After the hardship period ends, your regular account terms will return.
A workout agreement is when the lender agrees to modify the card’s terms, according to Experian. The creditor might lower your minimum payment requirement or your annual percentage rate or waive fees that you’ve already incurred. If you’re still receiving regular income, this option might be a way forward to repay your debt faster.
Pros and Cons of Negotiating Credit Card Debt
There are pros and cons to negotiating credit card debt, whether your goal is to reach a lump-sum settlement, hardship agreement or workout agreement.
- Can provide financial relief. Depending on the option you pursue, you might be able to lower your debt obligation, reduce interest and/or decrease fees.
- Potentially curbs bankruptcy. Negotiating your credit card debt might help you avoid needing to file for bankruptcy. If creditors come to an arrangement with you, they can avoid not getting any payment back if you do go bankrupt.
- Mental and emotional relief. Dealing with creditors can be stressful. In addition to receiving financial relief, negotiating your debt may quell fears of being sued or facing other consequences.
- Tax implications. When you pay less than you owe as part of a lump-sum agreement, the Internal Revenue Service treats any forgiven debt as taxable income. This might result in a higher tax bill for that filling year, Tayne says. Make sure to be financially prepared for this.
- Credit implications. When your credit report shows a credit account as settled, it will adversely affect your credit score. However, this isn’t as bad as having the account listed as unpaid. Some creditors will close the account when you negotiate, according to Experian, and this can adversely impact your score.
How to Negotiate Your Debt
There are a few steps to keep in mind when preparing your negotiations with your credit card company.
1. Verify the Debt
Make sure you know how much you owe to your credit card issuers before making a negotiation plan. Typically, issuers will sell unpaid debts to collection companies by the time they are six months late, so you may no longer be able to negotiate with credit card companies on older items.
Once you take stock of your debt, proceed to step two.
2. Decide on an Option
Review the various options against your financial situation and goals. A lump-sum settlement may get you the best deal, but a hardship agreement can be a better choice if you only need temporary relief.
Additionally, it’s helpful to have a list of terms you’d like to apply. For example, you can ask that your settled debt be marked as paid in full on your credit report, even if you settle it. The creditor may not agree, but it will help your credit if they do.
3. Contact Your Creditor
You can start by talking to a customer service representative at your credit card company. Throughout the negotiation, stay polite, but stick to terms that work for you. If you’re unsuccessful on your first call, don’t be discouraged. Call back again, and speak to another representative or a supervisor who can provide decisive recourse.
4. Ask Questions
During the negotiation, make sure you fully understand what you’re required to do and what the creditor promises to do if you meet the agreement terms. If you don’t know what something in the agreement means, you should ask for an explanation. Some questions to ask might include:
- How long will the process take?
- How will the account’s status be reported to the credit bureaus after the agreement conditions are met?
- When can I expect the agreement in writing?
5. Get Everything in Writing
Make sure you get all your desired terms in writing, before accepting a deal, says Scott Glatstian, attorney at Rosenblum Law. If the creditor agreed to report the account as paid in full, for instance, that should be stated clearly in the agreement.
What to Do if You Need Help Negotiating Your Credit Card Debt
If you don’t feel equipped to negotiate your credit card debt on your own, there are other options.
For-Profit Debt Settlement
For-profit debt settlement companies specialize in getting creditors to accept lump-sum payments that are lower than your total debt amount. However, be wary of this option – some companies use high-risk tactics, and there are fees.
The company will likely have you stop payments to the creditor altogether in the hopes of securing a lump-sum settlement. However, the creditors might simply refuse to deal with the settlement company, according to the Consumer Financial Protection Bureau. In this scenario, you’ve accrued more late fees and penalties on the account and taken hits to your credit, and you still owe the debt.
Nonprofit Credit Counseling
Nonprofit credit counselors work with you and your creditors to come up with a debt management plan. You can find credit counselors through entities such as the Financial Counseling Association of America and the National Foundation for Credit Counseling.
Counseling is often provided at no or low cost, according to the NFCC. Counselors can help not only with the credit card debt in question, but also with budgeting and other ways to stay on track financially.
Alternatives to Negotiating With Your Credit Card Company
Depending on your situation, an alternative approach might be a better fit. Some options include:
- Debt consolidation loans. A debt consolidation loan simplifies your debt repayment by combining two or more accounts into a single loan. You’re left with one due date, interest rate and minimum payment to keep track of each month. You may also be able to get a lower interest rate on a debt consolidation loan than a credit card.
- Balance transfer credit cards. A balance transfer credit card can be an alternative to negotiating credit card debt if a high interest rate is driving your problems. Eligible borrowers can choose a card with a lower interest rate or a promotional 0% APR and transfer all or a portion of their credit card debt to it. If you’re using a 0% introductory APR, be sure to make on-time payments and pay off the full balance before the introductory period ends.