Credit cards can be useful tools, or problematic if you've racked up more debt than you can afford to repay. Fortunately, there are options for dealing with credit card debt, including negotiating with your creditors for lower interest rates or better repayment options.
Why creditors are willing to negotiate
When consumers default on their credit card debt, there are a couple of consequences that can come up for the creditor:
- They write off that debt, meaning they’re declaring the money uncollectible in exchange for being able to report it as a loss on their taxes
- They sell the debt to collections, typically for pennies per dollar owed (read: it’s a massive loss)
“By negotiating the debt, the creditor may recover at least a portion of the amount owed, while the debtor can potentially avoid costly legal fees associated with debt collection. This process can ultimately provide a mutually beneficial outcome for all parties involved,” said Markia Brown, a certified financial education instructor and board-certified credit score consultant.
Negotiating your debt could also help you avoid things like wage garnishment and other negative marks on your credit report, such as closing a long-standing account and having a defaulted debt on your record.
It can also help you secure credit in the future by preserving your credit score. And, of course, if you can negotiate the repayment amount down, that can help you get out of debt faster and more easily.
Steps to negotiate your credit card debt
- Assess your financial situation: In order to come up with a solution that fits your needs, you need to understand exactly what kind of deal will be affordable for you based on your outstanding balance, interest rate, minimum monthly payment, as well as your income and other financial obligations. You’ll also want a backup plan, in case your original plan is rejected.
- Review your options for negotiating: There are several options for negotiating, including hardship agreements, lump-sum settlements, and a workout agreement. (More on those later.)
- Research your creditor's policies and negotiation practices: Some creditors may have policies in place that will limit your ability to negotiate, so familiarizing yourself with those beforehand can help you work within their practices to reach a good outcome.
- Negotiate with your credit card company and explain your terms: Armed with all of the above information, you can contact your creditor’s debt settlement department, begin the negotiations process, and present your plan. Remember: Politeness is key here.
- Take notes and make sure to follow up: There will likely be a lot of new information provided during negotiations, so you’ll want to take notes — especially regarding any repayment terms and potential penalties, and whether or not any follow-up is necessary to finalize things.
- Finalize and record your agreement: Once you and your creditor have agreed to terms, you’ll be able to finalize the agreement, which may be accomplished via email or by signing a form. Be sure to make a copy of this and save it in an accessible format. This will help you avoid any potential hiccups later on.
3 options for negotiating debt settlements and agreements
If you have a large credit card balance, you might be able to negotiate a debt settlement or agreement with your card issuer to manage it.
But before you contact your credit card company, it’s important to compare your negotiating options so you can decide which one is best for your financial situation.
Here are three strategies to consider when negotiating a debt settlement or agreement:
1. Hardship agreement
Best for:
- Long-time credit card users who have a good history with their card issuer
- Borrowers who need emergency, short-term assistance
- Borrowers who want to maintain a decent credit history
Several credit card companies offer hardship programs for borrowers facing financial difficulties. For example, you might be able to reduce your monthly payments, lower your credit card interest rate, have fees waived, or agree to a repayment plan that better suits your needs.
Keep in mind that assistance options vary by company as well as by your individual hardship. You’ll need to contact your card issuer to see what help is available to you.
Drawbacks:
- New cardholders might not be eligible
- Could extend the amount of time you remain in debt
- Might be hard to get back on your feet financially before a short-term relief plan ends
2. Lump-sum settlement
Best for:
- Borrowers whose credit card accounts have been delinquent for a long period of time
- Borrowers with enough cash to make a reasonable offer
- Borrowers whose credit has already been damaged
If you are quite far behind on credit card payments and don’t see a way out, you could consider asking about a lump-sum settlement. This is when you settle with your credit card company for a percentage or portion of your outstanding debt rather than the full amount.
How much you might be able to settle for will depend on your card issuer, how much you owe, how many payments you’ve missed, and how much you’re able to reasonably pay back.
Drawbacks:
- Third-party companies offering debt settlement could be running scams
- Low success rate unless you’re particularly far behind on payments
- Can be difficult to negotiate before your account is charged off and sent to collections
3. Workout agreement
Best for:
- Borrowers that haven’t missed a payment yet (or aren’t too far behind on payments)
- Borrowers who want to work with a credit counselor to come up with a repayment plan
- Borrowers who are facing long-term financial hardship but can afford to make at least partial payments each month
Another potential strategy is a workout agreement. With this option, you’ll negotiate a structured repayment plan with your creditors where you’ll pay off your credit card debt over a period of time.
You can also ask to modify your terms to make it easier for you to repay your balance in a shorter amount of time. For example, your card issuer might be willing to waive fees, lower your interest rate, or reduce your monthly payment.
Drawbacks:
- Can keep you in debt for a longer period of time, as you’ll still need to pay off your balances
- Card issuers might cut off access to your cards so you can no longer use them
- Loss of credit could negatively affect your credit score by increasing your credit utilization ratio
Other credit card debt solutions
While negotiating a settlement or other agreement with your card issuer might be a good choice in some cases, it isn’t right for everyone. Here are a couple of other options that could help you get out of credit card debt.
Balance transfer card
With a balance transfer, you’ll move your credit card balance from one card to another. Balance transfers are best used with a 0% APR introductory offer — which means you could avoid paying interest if you can repay your balance before the promotional period ends.
However, if you can’t pay off the transferred amount in time, you could get stuck with hefty interest charges. You'll also be assessed a balance transfer fee initially, which could be up to 5% of the amount you transfer and is added to your balance. If you’re considering this option, be sure to carefully read the fine print so there are no surprises down the line.
Pros
- Might be able to avoid paying interest through a 0% APR introductory period
- Some cards offer perks or rewards, such as cash back or travel points
- Could help you rebuild your credit if you keep the card open
Cons
- Typically charge a balance transfer fee from 3% to 5%
- Could be tempting to rack up a balance again
- Often not suitable for large amounts of debt
Compare: Debt Consolidation vs. Balance Transfer
Personal loan debt consolidation
Another option is using a personal loan to consolidate your debt — leaving you with just one loan and payment to manage. Personal loans typically range from $600 to $100,000 or more, depending on the lender.
Additionally, these loans often have lower interest rates than credit cards, which means you might be able to save money on interest and potentially pay off your debt faster.
Pros
- Could get a lower interest rate than what you’ve been paying on credit cards, depending on your credit
- Can consolidate multiple types of debt — for example, you could consolidate bills along with your credit cards
- Could have 1 to 7 years to repay your debt, depending on the lender
- Often suitable for large amounts of debt
Cons
- Could be hard to qualify if you don’t have good credit
- If you take out a personal loan with bad credit, you might not qualify for a better interest rate than what you’re currently paying
- Might come with fees, such as origination fees
Before you get a personal loan to consolidate credit card debt, consider lenders as possible to find the right loan for your situation.
