Negotiating Credit Card Debt: Is it Possible?
If you’re behind on payments or having trouble making your monthly payments, credit card debt negotiation may be an option.
You may want to bring your account balance to zero with a negotiation, but that doesn’t mean the credit card company will settle for less than you owe. Before settling on a payment plan with you, credit card companies will consider the current status of account.
“If you can’t afford your minimum payment each month, the creditor probably isn’t going to reduce your payment,” says Mike Flynn, a law professor at Nova Southeastern University. “If your account is current, but you’re having a hard time making payments, that’s the ideal situation to negotiate.”
Creditors are also less likely to settle with consumers who have low credit scores.
“If your credit rating is in the 500-600 range, it shows the credit card company you’re capable and responsible enough to pay, so they may give you a bit of room,” Flynn says. “With a credit score of 300, they’re not going to want to decrease your interest rates because they figure you’re not going to pay anyway.”
According to the Q2 2024 TransUnion Credit Industry Insights Report, the average credit card user has $6,329 in credit card debt, however not everyone should rush into debt settlement. If your credit card debt has become a significant burden there are several options to consider depending on your specific financial situation.
Types of credit card debt settlements
Every credit card company has specific guidelines they follow when reducing interest rates or payments for those struggling with credit card debt.
When you call your credit card company, you can request a lower interest rate or minimum monthly payment, forbearance of payments, or a debt settlement agreement. Here’s a look at several types of these options.
Lump-sum debt settlement
In a lump-sum settlement, the creditor agrees to accept a large payment upfront that is lower than the full balance the borrower owes in order to settle the debt. While this may sound good, there are some potential downsides to going this route.
A drop in your credit score: If you choose to take on a lump-sum settlement, it will show on your credit report that you were unable to pay the total debt in full. This mark can stay on your credit report for seven years.
Consumers can choose to partner with a debt settlement company, or lawyer, or pursue a lump settlement directly with the credit card company. Debt settlement companies usually encourage you to forgo making a monthly payment on your debt and instead work towards paying a lump sum. However, stopping payments completely can have a negative impact on your credit history, as payment history makes up 35% of your FICO credit score.
Unreliable outcomes: For-profit debt settlement companies charge hefty fees for their services, typically 15-25% of the amount owed, according to the National Foundation for Credit Counseling.
“If you pursue debt settlement, you have to make sure you’re working with a reputable company,” says Tasha Bishop, director of digital innovation and development at Apprisen, a nonprofit credit counseling agency. “It can be a safer option to work with your creditors directly.”
Some debt settlement companies will attempt to take advantage of individuals who are financially burdened. Be aware that debt settlement companies may not be able to settle your debt even if you’ve set aside the amount of money the settlement company requires.
An attorney can help evaluate your financial situation and determine if debt negotiation is something that will benefit you.
“An attorney can negotiate with the bank to make the payments reasonable,” Flynn says. “The bank will take cents on the dollar just to take something if they don’t think you’ll be able to pay.”
Tax liabilities: The forgiven balance from a debt settlement can also have tax implications. For example, if you had a debt of $6,000 and the credit card company is willing to settle for $4,500, you may be obligated to pay taxes on the forgiven debt of $1,500. If a debt was canceled, forgiven, or discharged, the IRS can require you to complete a 1099-C, depending on your financial situation.
Workout agreement
If you’re earning money, but not enough to make your monthly payments, and face long-term financial challenges, a workout agreement may be right for you. With a workout agreement, credit card issuers will lower your interest rate or reduce your minimum monthly payments so it’s easier for you to pay. You can also ask for forgiveness of late fees or other penalties.
“Creditors want to understand what’s going on with your situation specifically and then tailor a solution based on what’s available internally,” Bishop says.
With a workout agreement, some companies may cut your credit line, which will hurt your credit utilization ratio and negatively impact your credit score. Your creditor may refer you to a debt management program with a nonprofit credit counseling agency or an in-house program.
Hardship agreement
If you’re experiencing financial hardship from a temporary financial setback like a job loss or medical illness, inform your creditors instead of stopping your monthly payment without an explanation. A hardship agreement is also known as a forbearance program.
With this kind of program, a creditor may temporarily lower your interest rates, reduce minimum payments, or hold fees and late penalties. The deferment is not debt forgiveness; you will eventually have to repay the credit card issuer.
This type of agreement can impact your credit score depending on how the lender reports the transaction to the credit bureaus, so it is advisable to ask.
More options
If settlements or other types of negotiations don’t work for you, there are other debt-relief options to help with your personal finance situation:
Debt-management plan
With debt-management, consumers work with a nonprofit credit counseling agency to help them navigate their money management issues. Consumers will work with a credit counselor to develop a feasible strategy to pay back the full amount of their credit card debt.
Debt-consolidation loan
A debt consolidation loan is designed to streamline monthly payments if you’re juggling several credit card balances, which can save you money over time. Instead of paying each of your credit card issuers, you make a single monthly payment. Consumers can apply for a debt consolidation loan from banks or online lenders.
Depending on your credit score or financial situation, interest rates for a debt consolidation loan may be higher than their credit card interest rates. Consider this before deciding on the right option for you.
Bankruptcy
If you are severely burdened by debt, filing for bankruptcy can be implemented as a last resort. Bankruptcy can stay on your credit report for 10 years and prevent you from attaining favorable rates on loans.
“We want to make sure we’ve exhausted all other options first, as bankruptcy has a long-term impact on your credit,” Bishop says.
The bottom line
Paying off credit card debt can take time and perseverance, no matter how you go about it. Regardless of the route you choose, avoid late payments and stick to the repayment plan that’s right for you.
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