Credit Card Debt Settlements: How to Negotiate Reduced Payments & Forgiveness
Credit card debt doesn’t have to be an inescapable monolith in your life. You can negotiate with your credit card company to work out a debt repayment schedule or other settlement plan that works for both you and your card provider. Find out how negotiating your credit card debt works, and how to get a repayment schedule that you can meet. Once your credit card debt is payed off, you’ll probably feel like a huge burden has been lifted from your life, so get started on the right track now.
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Why It’s Important to Pay Off Your Credit Card Debt
Not all debt is bad. In fact, some debt is necessary to maintain a good lifestyle and keep your financial health in a good place. Good debt can include things like your mortgage, personal loans that you can pay off in a timely fashion, and sometimes student loans as well.
Credit card debt is not a kind of good debt to carry over the long term. In fact, credit card debt is probably one of the worst kinds of long term debt that you can hold. This is why you want to get rid of it as quickly as possible. Credit card debt is especially bad for a few reasons.
- High Interest: Credit card companies will often charge relatively high interest rates on your credit card account balance. So while the interest rate on your mortgage these days might be somewhere between 2 and 7 percent, credit card interest rates can go as high as 36 percent. As long as you carry a balance, this interest will just cause you to owe more and more in credit card debt.
- Credit Score: Paying off debt helps build credit, but holding credit card debt is disastrous for your credit score. 35 percent of your credit score is determined by your payment history, so you must make payments on time in order to maintain a good score.
- Easily Avoidable: A mortgage is necessary for almost anyone who wants to buy a home. Likewise with student loans and a college education. However, compared to other forms of debt, credit card debt is easily avoidable. Maintaining a budget and avoiding credit card mistakes will help you stay out of debt.
Understanding the Credit Card Companies
Credit card companies are complex entities. However, at the end of the day, they mostly just want to make money. It’s important to understand how credit card companies think so that you can come to the negotiating table with an idea of what they will expect from you when it comes to repaying your credit card debt.
Like we said, credit card companies want their money. More than anything, they want to collect your credit card debt. This means that they are willing to make certain accommodations for debt holders if they think that it will improve their chances of eventually getting repaid. If you are unable to pay your credit card debt as it stands now, then go to your credit card company with a repayment schedule or another offer that will help you to pay it off. If it works out in the favor of the company, they might just accept it.
How Debt Settlements Affect Your Credit
Before you head into any debt negotiation, you should be aware of two potential risks. First, debt forgiveness may only provide temporary relief. Yes, having debt forgiven means you no longer have to pay some or all of what you owed; however, that can often qualify as a form of income for tax purposes. If the credit card company agrees to reduce or eliminate charges, you could see the amount in question come back in April as part of your federal income tax return. Whatever you didn’t end up paying, you may end up having to claim as income.
The other potential downside to a debt settlement or repayment plan is the damage it can do to your credit score. While negotiating a repayment plan isn’t quite as damaging to your credit as declaring bankruptcy, it can have a similar impact. As soon as you decide to call your credit card company to negotiate, realize that your access to that credit card, as well as your future ability to qualify for loans or lines of credit may be diminished. You must decide before starting negotiations whether the short term benefit of a reduced bill or outstanding debt is worth more than the longer term damage to your credit score. Of course, you can always plan ahead to start repairing your credit, but you should still weigh the risks and benefits ahead of time.
Negotiating Your Debt With the Credit Card Company
The first step to negotiating with your credit card company is understanding your position at the table. The final outcome of your negotiations depends on where you stand and what you need from the credit card company in order to make your payment. Depending on your exact situation, there are three main ways that you might negotiate with your credit card company.
Cancel Late Payment Charges
Late payment charges are tacked on to your balance if you are unable to meet the minimum required payment for a month of the billing cycle. While late fees are usually avoidable, you can end up with them during a rough month or after making a mistake like missing a payment. If you are generally an exemplary customer, then you have a better stance to negotiate with your credit card company to drop a few late fees here and there. Point out your strong history with the company and high credit score for a better chance of swaying the company representative. Best of all, getting fees like this waived doesn’t generally impact your credit score, so it is a low-risk way to reduce your credit card debt.
Negotiating Repayment Plans
Credit card debt can get much worse than late fees. If you’ve been unable to meet your minimum payments for a while, then your credit card company has probably come knocking and wondering where their money is. At this point, you will want to start working towards a repayment schedule. You may not be able to pay off the full amount just now, but, like many other loans, you can pay it off over time in installments. Negotiate with your credit card company to find a payment schedule that suits you both.
It isn’t uncommon for credit card companies to offer you a lower interest rate on your outstanding debt, in exchange for you agreeing to a new repayment plan. The trade-off is that the credit card company still makes some money, and you have a better chance of affording the debt and interest. However, this is technically still debt forgiveness, which may count as a form of income for tax purposes. You don’t want to get a reduced payment obligation on your credit card only to see your tax bill surge come April, so make sure you know exactly how much of your debt bill is being written-off, and how that will change your tax situation.
Arriving at Credit Card Debt Settlements
Sometimes you’re in the worst financial situation imaginable: you’ve accumulated credit card debt and there’s no way that you will be able to repay it anytime soon, even with a repayment schedule. If you are in this situation, then you may be able to negotiate a settlement on your debt, which can also help your credit score. Remember that the credit card company wants to get their money. If you are about to go bankrupt, they know that they’re likely to get more money back by accepting whatever you can pay now than by waiting for you to repay the full amount.
Debt settlements often take the form of a single lump sum payment. In this situation, your credit card company agrees to write-off most of the outstanding interest and possibly some share of the principal debt you owe, as long as you can make one final payment on the account. While this may seem like a great way to reduce your credit card debt and end collections calls, it will also likely count as a form of income on your tax return, and could change what you owe the IRS. You should also expect to lose access to the credit card account you are negotiating a settlement for, since by asking to negotiate, you’ve basically warned the credit card company that you can no longer be trusted to use that line of credit.
Credit card debt can be a nasty thing. By understanding your situation and the desires of your credit card company, you can negotiate to find ways of handling your credit card debt that work for you. The sooner you get rid of your debt, the sooner you can return to a healthy financial life.
Visit our credit card resource center for more tips and guides. Trying to improve your credit score? Visit our credit score learning center. Need help writing a letter to your creditor or the credit bureaus? Visit our letter template resource center.
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Nick Cesare is a writer from Boise, ID. In his free time he enjoys rock climbing and making avocado toast.
This post was updated February 28, 2019. It was originally published September 28, 2017.