If you’re struggling with credit card debt, you’re not alone. A recent survey from Clever Real Estate found that 61% of Americans have credit card debt and that borrowers owe an average of $5,875. But did you know you’re qualified to negotiate a payment plan for your credit card debt? Read on to learn how to negotiate credit card debt, different types of credit card settlements and alternatives to help you take control of debt.
Why Negotiating Credit Card Debt is Important?
First, why can you negotiate credit card debt? Credit cards are unsecured debt, which means that card issuers may be willing to work with consumers to create a feasible payment plan. In some cases, negotiating credit card debt can harm your credit score or result in the closure of your card, but in the long term, you’ll have better chances to build up your credit score.
If you’ve tried other options, negotiating credit card debt can relieve people facing financial difficulties. Proactively negotiating credit card debt brings numerous benefits. And you can create a proactive solution for a problem that may feel like it’s spiraling out of control.
It can help you avoid a charge-off and protect your credit score from dropping further. It can help you reduce stress and put a plan in place to work with creditors to pay off debt. More importantly, taking control of your debt could reduce the stress you feel without a plan.
Understanding Your Credit Card Debt Situation
The first step in any negotiation is understanding where you stand and what is a reasonable offer. Start by reviewing and understanding your current credit card debt situation. Assess the total amount owed and whether that’s spread over one or multiple cards.
Look at the interest rate on each card, minimum requirement payments and possible late fees. Then, consider whether you can meet at least the minimum payment on all cards while paying off more on one card at a time. If not, it’s time to negotiate.
The consequences of failing to address credit card debt start with a poor credit score that can have far-reaching implications for other financial opportunities like loans, mortgages, insurance or, in some cases, employment.
In addition, in severe cases, creditors could garnish wages, seize assets or place a lien on your home. Even if you pay off the debt, you’re not immediately clear because nonpayment of credit card debt remains on your credit report for up to seven years.
Assessing Your Payment Capability and Budget
An important aspect of dealing with credit card debt is looking at your budget to see whether you can increase your repayment capability. Determine a realistic budget based on total income and expenses. See whether there’s any discretionary spending where you can cut back. If not, consider a side hustle or other opportunities to bring in extra money quickly.
To start, you’ll want to calculate your disposable income. Disposable income is your income after setting aside money for all required taxes. This is how much you have at your disposal for personal expenses. Then, look at essential expenses like food, housing, transportation, insurance and medical expenses.
After deducting these from your income, how much is left? This is for your discretionary expenses, including credit card repayment and extras ranging from clothing to recreational activities. If you’re struggling to get ahead of credit card debt, allocate as much as possible to paying off the debt, and find more tips to pay off credit card debt.
You can also consider debt-repayment strategies to decide which credit card to pay off first, like:
- The avalanche method — paying off the card with the highest interest rate first
- The snowball method — paying off the card with the lowest balance first
Effective Tips on Negotiating Credit Card Debt
If you need to go ahead with negotiating credit card debt, these tips and strategies can help you plan to get out of debt effectively. Regardless of negotiation tactics, the importance of carefully reviewing any proposed agreements before accepting can’t be over-emphasized. Be sure you know what you’re agreeing to.
Tip No. 1: Ask for Lower Interest Rates
You can ask for a lower annual percentage rate (APR) short term or for a year. Insisting on a lower interest rate can mean that more of your payments go to paying back the loan’s principal.
Tip No. 2: Ask for a Balance Transfer or 0% APR
Building on the lower interest rate suggestion, see whether you can make a balance transfer to a card with a 0% APR with the same bank, or ask for a 0% APR offer for six months to pay off the debt.
Tip No. 3: Ask for Lower Repayment Amount
According to the American Fair Credit Council, creditors will often accept pennies on the dollar, especially if your account has been without payment for some time. The average settlement amount is 48% of the balance owed or less than 50 cents for each dollar. Negotiate with the creditor to settle for a lower amount. This usually takes the form of a lump-sum payment.
Tip No. 4: Explore Alternative Repayment Options
Exploring repayment options can include:
- Consolidating debt onto a 0% APR credit card
- Getting a debt consolidation loan
- Getting a home equity agreement
- Borrowing money from family or friends to pay off debt
Different Types of Credit Card Debt Settlement Plans
- Lump-sum settlement: Creditors may let you pay a smaller lump sum instead of the full balance owed.
- Workout agreement: Creditors may offer a workout agreement where they waive or reduce the minimum monthly payment, lower your interest rate and remove past late fees to make it easier to pay off debt.
- Hardship: If you qualify for a credit card hardship program, creditors will reduce or pause credit card payments, lower APR and waive fees to help borrowers in hardship avoid default.
Is It Advisable to Negotiate Credit Card Debt?
Negotiating credit card debt may actually hurt your credit score more. For that reason, it’s not advisable to negotiate credit card debt if you have options to make payments.
If you’re struggling to make ends meet, negotiating credit card debt can help avoid more harm to your credit score and reduce debt-related stress by creating a clear plan to pay off the debt.
Exploring Alternatives to Credit Card Debt Settlement
In addition to negotiating a credit card debt settlement, you can consider other strategies to consolidate and pay off debt. These include:
Balance Transfer
A balance transfer to consolidate debt on a credit card with a 0% APR or lower APR can make it easier to manage the debt and work to pay it off while incurring less interest and fees.
Debt Consolidation
Debt consolidation loans are designed to help you transfer credit card debt into a single loan with a lower interest rate. You’ll usually have set monthly payments for the loan term, offering a clear path to remove the debt. Learn more about consolidating credit card debt.
Debt Management
Debt management, a debt adviser or similar professionals may offer free or low-cost advice for borrowers struggling with consumer debt. They can advise you on government programs and other opportunities to help you pay off the debt faster. Or check with the National Debtline for free support.
When to Consider Credit Card Debt Negotiation
Negotiating credit card debt is a last resort. If you cannot make a repayment plan on your own, credit card debt negotiation can be an empowering solution to take control of the debt and move on. Find more tips to pay off credit card debt fast and then learn how to raise your credit score.
Frequently Asked Questions
What is the typical percentage that credit card companies will settle for?
According to the American Fair Credit Council, if the debt is with the original creditor, they may expect at least 80%. If the debt is already shifted to a collections company, you could settle for as little as 48%.
Is it worth settling credit card debt?
It can be worth settling credit card debt if you can’t pay it off or consolidate it another way.
Will my credit score go up if I settle a debt?
Settling debt can have a negative short-term effect on your credit score. If you negotiate a lower payment, the debt won’t show full repayment on the debt. Over time, you can rebuild your credit score, and settling will have less impact as you have other positive factors like on-time payments and low debt.
How long does a credit card settlement stay on your record?
A credit card settlement will remain on your credit score for seven years from its delinquency date.
Can you get another credit card after settlement?
Yes, you can get a new credit card after settlement, even from the same credit card issuer.
About Alison Plaut
Alison Plaut is a personal finance writer with a sustainable MBA, passionate about helping people learn more about financial basics for wealth building and financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgage, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she is a regular contributor for Benzinga.