Credit card debt in the United States is a significant financial issue. A large number of Americans carry substantial balances on their credit cards and often struggle under the weight of growing outstanding amounts, high interest rates, and card fees. If you find yourself trapped in a cycle of debt, facing financial hardships, and barely able to make minimum payments on time, it may be time to consider creating more manageable repayment terms by actively negotiating your credit card debt. Successful credit card payoff negotiations can help alleviate your financial strain while limiting damage to your credit score.
This blog will guide you through the process of negotiating credit card debt, explore how credit card settlement negotiations work, and shed light on the various credit card debt settlement options available to you.
How Does Credit Card Negotiation Work?
Credit card negotiations usually conclude in a settlement of the outstanding debt for less than the actual dollar amount owed. These negotiations can be conducted by the borrower but are usually handled by a third-party debt settlement firm. If you choose to negotiate a settlement through a third-party agency, you will be required to make future payments directly to them and may also be charged a service fee.
Negotiating credit card debt can provide financial relief by helping you pay off outstanding debts quickly. Settling debts this way can lower your credit score, and there are tax implications as well. For example, if you settle a $10,000 outstanding debt for $7,000, there is a possibility you will be taxed on the $3,000 difference.
The Different Kinds of Credit Card Debt Settlements
There are three common types of settlements that credit card issuers are most likely to accept. A borrower’s precise financial situation will determine which of these settlement options suits them best. Read on to learn more about these popular settlement avenues.
Workout Agreement Plan
In a workout agreement, the credit card company may temporarily reduce or waive the interest to help the borrower cope with the financial challenges they are facing. Waiving prior late payment fees and lowering the minimum payment amount are other measures that may be taken to help manage credit card debt under a workout agreement plan.
A workout agreement plan can also involve the closure of the credit card account. While prior late payments may have lowered the borrower’s credit score, account closure can help raise their credit utilization rate by canceling their available credit limit. Up to 30 percent of the FICO Score is based on credit utilization, and raising the credit utilization score in this manner can mitigate the damage to one’s credit score.
Hardship Agreement Plan
A hardship agreement, also called a forbearance program, is the ideal option for individuals facing a temporary financial setback, such as a sudden illness or loss of employment. If your card issuer offers such a plan, they may agree to temporarily lower the interest rate, waive late fees, reduce minimum payments, or even allow you to skip a few payments till you get back on your feet.
The terms of the lender’s hardship agreement will clarify whether or not negative information, such as missed payments during this period, will be reported to the credit bureaus. In that case, your credit score and history may be negatively impacted.
Lump-sum Settlement
Using the lump-sum settlement approach, the borrower can negotiate with the credit card issuer to settle the outstanding debt with a one-time payment that is less than the full amount owed. A lump-sum settlement offers relief to individuals faced with substantial credit card debt as it offers a resolution with a single payment.
For example, suppose a borrower has a credit card balance of $8,000 in charges, fees, and interest. They may propose paying the card issuer $5,000 to close the account. If both parties can agree, the card issuer will waive the balance of $3,000.
Two potential disadvantages come with a lump-sum settlement. The first is a remark on the borrower’s credit report to indicate that the account was settled for less than the total amount actually due, which can damage their credit score. This situation can be worsened if payments were already overdue at the time of the settlement. The second disadvantage of this type of settlement is that it may be necessary to report the waived amount as income, meaning that the borrower may incur taxes on this amount.
Steps to Negotiate Credit Card Debt
Credit card payoff negotiations can be challenging as card issuers will resist changes to their terms unless they fear that the borrower may declare bankruptcy. Whether you decide to handle the negotiations independently or enlist professional assistance, being well-prepared for the negotiation is crucial. Follow the steps below to negotiate credit card debt.
Figure Out How Much you Owe
Before starting to negotiate, it is important to confirm your outstanding debt. The balance is available online or with the credit card company. It is also advisable to verify the interest rate you are currently being charged.
Weigh your Options
Based on your financial situation and other circumstances, you will need to ascertain whether a workout agreement plan, hardship agreement plan, or lump-sum settlement is right for you.
Contact your Credit Card Company
Once you have decided to commence with the negotiation process, it is time to contact the loss mitigation, debt settlement, or hardship department at your credit card company. Once you get through to the relevant department, explain your circumstances, make an offer, and start negotiating.
Get your Agreement in Writing
Once negotiations are through and an acceptable agreement has been reached between you and the credit card company, be sure to collect the relevant documentation. Only once you have everything in writing is your agreement valid.
Will Settling Credit Card Debt Impact My Credit Score?
The credit card settlement options outlined above entail modifying the terms and conditions of the initial cardholder agreement. Once these changes are made, the credit card company will probably report the alterations to your account status to the national credit bureaus. As a result, the credit reports for the next seven years may include negative entries about settled accounts, accounts closed at the card issuer’s request or forbearance. As long as these negative entries remain on the credit report, they will damage the individual’s credit scores, although the severity of the damage will lessen over time.
Read More: Does Credit Card Consolidation Hurt your Credit Score
Conclusion
Negotiating credit card debt can help manage your credit card debt, especially if you are struggling with your finances, and there are various options to choose from. It involves discussing revised terms, reduced interest rates, and restructured payment plans with your credit card company to help you better manage and clear your debt.
Still confused about credit card debt management? Start your free evaluation today to find the solution best suited to your unique financial problems. Working with Epic Loans‘ Debt Consolidation Specialists can help you come up with the best credit card debt consolidation loan to make sure you can pay off your debts easily and quickly.
Frequently Asked Questions:
Negotiating credit card debt does have the potential to negatively affect your credit score if the credit card company reports the details of the settlement to the credit bureaus.
You will need to contact the relevant department within your credit card company, usually the loss mitigation, debt settlement, or hardship department before you can start negotiating.
There is a good chance that creditors will settle for less than the total amount due and waive the balance if you opt for a lump-sum settlement.
