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Even before the Covid-19 pandemic, consumer debt was at an all time high according to the Federal Reserve. So if you have credit card debt, you are not alone.
What may surprise you is that you are in a unique position to negotiate your credit card debt on your own. We tend to rely on professionals to meet the challenges: auto mechanics, lawyers, trainers. But it doesn’t take a finance degree to successfully develop a payment plan with your credit card provider.
Being proactive about your debt can help you avoid a cancellation and protect your current credit score. Most importantly, taking control of your debt could reduce the stress you feel without a plan. By contacting your creditors, you could create a plan that gets you in the know.
Why Should You Negotiate Your Credit Card Debt?
If you have a high credit card balance or have missed payments, you may have heard of a debt settlement company. Often times, these organizations promise to pay off your debt for pennies on the dollar. It may seem like a relief to have someone else do the work for you. But the Federal Trade Commission cautions that you may not get the results you want.
Debt settlement companies may advise you to stop making your minimum credit card payments, which can lead to late fees, a higher penalty APR, and ultimately more debt to negotiate. Failure to communicate with your card provider and keep up to date with payments can result in a default. If you are in default, your account could be moved to Collections. Even if your debt is not paid off, missed payments can negatively impact your credit score.
Also, remember that not all creditors will work with debt settlement companies. These debt negotiators may not disclose this up front. Many debt settlement companies are for profit, so their main focus is to make money with you, not to settle your debts.
In many cases, your best option is to negotiate your own debt. By taking charge of the situation, you have a better chance of achieving a result that will actually work for you.
Types of Credit Card Debt Settlement Plans
Negotiating your credit card debt can be intimidating, but it’s a well-worn path that many have already taken. Credit card companies frequently offer one of many types of settlement plans: practice agreements, hardship plans, and lump sum settlements.
A reorganization agreement is a repayment agreement with your creditor, usually entered into after your account goes into default. Ripple agreements may include a reduction in your interest rate and / or waiving the fees associated with default while you are in repayment. If you enter into a training agreement, your creditor may offer you easier repayment terms for a specified period of time to allow you to settle your balance.
After the term of the agreement has expired or if you breach the agreement, your usual credit card terms, including interest and charges, may take effect. If a penalty APR was imposed on your card before the agreement, you can revert to the penalty APR. Make sure you get a written agreement. Once you have entered into a training agreement, you are responsible for complying with the new terms. Your creditor does not need to notify you if your interest rate increases if you are not in compliance.
If you are having difficulty due to a medical crisis or job loss, some credit card companies will enroll you in a hardship program. During the Covid-19 pandemic, many banks have announced their willingness to put in place hardship plans for customers affected by a sudden change in their finances. Although the word “program” gives a tidy and clearly defined appearance, your creditor will usually develop a program for your particular case.
Lump sum payment
It is an agreement to settle a debt to a creditor for a one-time or lump sum payment. In most cases, this is the approach a debt settlement company will take. For example, if you owed $ 12,000, you could settle a total payment of $ 8,000. You can also ask to negotiate a new principal amount owed on your credit card, but in this case fees and interest rates will still apply. Remember, creditors don’t have to accept less than you owe, but it never hurts to ask.
Be aware that paying less debt than you owe could have unexpected tax consequences. If you pay off your debt for a reduced amount, your credit card company could report your settled debt to the IRS. Because you are paying less than the amount you spent, debt reduction could be considered taxable income. If you are paying off a large debt, consult your tax professional to learn more about your tax impact.
Where to start with credit card debt
Evaluate Your Debt
Take the time to research how much you owe on your credit card (s). Find out if your payment is overdue and calculate the total amount you owe.
Take note of all fees as they can be easily negotiated if you have a history of timely payments. You may want to write all of this down so that you have it clearly in mind when you call.
As with any negotiation, you need to know how much you can afford. Figure out how much you can afford to pay each month, and don’t over-promise what you can afford.
Keep the lines of communication open
Once you’ve gathered your data, allow time to call your credit card provider when you’re not in a rush.
If your financial situation has changed, let your credit card company know that you are having difficulty making your minimum payment and explain why. Be factual. Explain your difficulties, but be aware that the appeals representative may have answered many calls. Don’t be offended if they initially don’t understand or seem empathetic.
Ask if you are eligible for an assistance program
If your income has been affected by the pandemic, you may be eligible for a specific hardship or relief program. Ask if your creditor offers these programs and if you qualify for them. Go to the call with a specific list of questions.
Relief and hardship program Questions to ask:
- If I can’t make my payment because of Covid, do you have a financial assistance program?
- Are there any fees associated with these programs?
- If I postpone or decrease my monthly payments, will interest continue to accrue during this relief period?
- How long does the relief period last and when should I start paying off my bill?
- What if my financial situation has not changed after the period ends? Is there an option to re-evaluate?
- What information will be communicated to the credit bureaus?
Even if you do not qualify for an assistance program, be prepared to ask additional questions:
- Am I eligible for a reduction in my interest rate based on customer loyalty?
- Can I postpone or reduce my monthly payment?
Request a payment plan
If you’re ready to start making payments right away, your creditor may be willing to offer you a payment plan. Your credit card provider wants your money. If they make a payment plan with you, they’re likely to get more money than if you default or even let a debt settlement company negotiate.
Your creditor will consider a few key factors when determining whether to offer a payment plan:
- Your payment history
- The total amount due
- Your available credit
- The length of time the account was held
Additionally, your payment plan will depend on whether or not you need to continue using your card. If you decide to stop using your credit card, let them know that you don’t intend to continue making changes. Ask if they can lower the interest rate and try to calculate an affordable monthly payment.
If you need continued access to your credit card, you can request a monthly payment or a reduced interest rate. If you’re a long-time customer with a solid payment history, you have more bargaining power. Your credit provider understands that if they are supporting you through a tough time, you are likely to stick with them when your income rebounds.
If at first you can’t do it, remember! Don’t take an initial “no” for the final answer if you have a strong case for it. If the first person couldn’t negotiate with you, try again. Being persistent shows that you are serious about solving this problem. You can also call a representative with a little more seniority or someone more experienced in credit card debt settlement.
Be calm and kind to each representative. Remember they have limited authority. You may need to speak to another service to resolve your issue.
Get it in writing
Whatever you agree to, make sure you get the agreement in writing. Read it to make sure the written summary of your agreement matches your understanding. And then keep it for your records.
In general, it’s wise to keep track of all of your interactions with your credit card provider. Keep a call log with the date, contact name and summary of each call as well as a payment log of the date, method and amount of each payment made.
Make sure you know all the details about the impact of any deal on you.
- Can you still use your credit card?
- How will your card provider report this to the credit bureaus?
Ask for help
While you don’t have to be an expert, talking to a professional can be stimulating. If you decide to seek professional advice, look for a approved credit counselor. Most of these services are free and regulated by the federal government. A certified financial advisor or financial fitness coach can provide you with unbiased information to help you make the decision that best meets your needs.
If you’re behind on your payments or have lost your income, speaking with your credit card provider is an important first step in managing your debt. By staying in communication with your creditor, you can avoid additional charges and potentially protect your credit score. Knowing your options for renegotiating your credit debt and working with your creditor to develop a plan can help you get your credit card debt under control.