How to Negotiate Credit Card Debt

First off, I have to say that writing an article like this doesn't exactly bring me joy. Yet I know that we're not all in a position to be able to pay off our debt the old fashioned way.

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Negotiating credit card debt may be the only option for those looking to shake that debt once and for all. This article will teach you exactly how to negotiate credit card debt the right way if it's your only option.

And yes, there are some better ways, which I'll show you. First let's take a look at some statistics:

The average credit card debt for indebted households has increased each of the past 3 years. Even households that have no other debt have seen their balances increase:

Source: NerdWallet 2015 American Household Credit Card Debt Study

The fact of the matter is that credit card debt is real. And it's growing.

I love to talk about early retirement, having no debt, and living below my means. But it'd be stupid not to acknowledge the fact that not everyone has these luxuries.

It's not for me to judge whether you're making the right life decisions or not. But I do feel the need to want to help where I can.

As I said above, this article is going to give you actionable advice to be able to negotiate your debt the right way. But before we do that, let's explore some other options. These are all things I'd suggest you try before going down the path of negotiating your debt:

Options 1-3, before attempting to negotiate credit card debt

1. Transfer your balances

Photo by Paul Stocker

I can't stress this enough - only complete a balance transfer if you know what you're doing. This is a short term option that could spiral out of control if you don't manage it right.

A balance transfer is when you use one credit card to pay off another. For instance, let's say you have a 2.99% promotional offer on one of your credit cards.

Many times you will get checks in the mail or notified when you log into your account online. If not, you can call you credit card company and ask what's available.

You then use that promotional offer to pay off other credit cards. This puts a balance on the card you're using the promotion on. Here's an more detailed example:

Credit Card A has a balance of $5,000 and an interest rate of 18.99%. Credit Card B has a balance of $2,000 and has $10,000 of available credit. It also has a 1.99% promotional offer for balance transfers for 12 months.

You can use Credit Card B to pay off Credit Card A. So the new balances would be as such:

There are some risks you'll have to consider, though. First, remember that this is just a promotional rate. As soon as the promotion ends, your rate will go back to whatever the standard rate is on the credit card. Considering average credit card rates, this may not be workable for you.

You'll also need to make sure you're making payments on time. Most promotional offers will void if you miss a payment, so be sure to read the terms and conditions.

Lastly, you'll want to check out any balance transfer fees before doing this. Some credit card companies will charge you a fee, which eats away at any savings you're expecting.

One bonus is the Credit CARD Act, which went into effect in 2009. It forces creditors to put anything beyond your minimum payment toward the highest rate. This is just one of the many consumer benefits of the Credit CARD Act.

When I was first selling promotional balances, this wasn't the case. Customers were trapping themselves into higher interest rates.

So if you can manage it and know what you're doing, a balance transfer could be a good option for you. Just make sure to do all your research first (and don't charge the balances back up after you've paid them off).

2. Consolidate your debt

Again, I stress knowing what you're doing when looking at a consolidation loan. I've seen this go downhill for so many people when I was a credit analyst.

A consolidation loan is a lump sum of money given to you to pay off your credit card debts, creating a new loan. If done right, it can save you a lot of time and money. It can also help you stay away from negotiating or setting your debt.

Debt consolidation is like a balance transfer, only it's not a promotion so the rates are higher. There are many different types of debt consolidation loans, so be sure to look at the following before signing up:

The only time I would ever suggest a consolidation loan is if you can answer 'yes' to all those questions.

I'd also look for a company that will just pay your cards off for you. There are some companies, such as Payoff, that I do not recommend.

While they're marketed as a debt consolidation company, they do something different. Payoff will actually deposit the funds into your checking account for you to pay off your cards on your own.

The problem is that you're at the point of needing a debt consolidation loan. Most likely because you can't afford your payments. So giving you a lump sum of cash to manage isn't the best idea.

I've seen this go so sour for many people. They say they want to pay off debt, so we give them $20,000 and they just end up spending it or using it for something else.

Keep the money out of your hands and find a reputable company that will pay off your balances for you.

3. Work with a credit counseling service

This is hands down the best option to try before settling your debt. A credit counseling service can be a lifesaver (it can also be a credit saver).

A good, reputable credit counseling agency is one that's registered through the NFCC. They're almost always non-profit and aim to help consumers get out of debt. Not line their pockets.

What they'll do is work with you to understand your income and expenses. They'll help you create a budget. Then they'll reach out to your creditors for you and negotiate your rates lower.

The catch (if you want to call it that) is usually that you'll need to close your credit card accounts. But if you're considering negotiating or settling your debt, that might be the best thing for you.

Banks are more likely to approve a lower rate if they see you're not planning on racking up any more debt. Also, the success rate of credit counseling agencies paying your debt back is high. This makes banks happy.

Check out this guide I've put together on credit counseling to see if it's right for you. In my opinion, this is the best option to try before anything else.

Option 4, how to negotiate credit card debt when all else fails

Now, if none of those options work for you, it might be time to consider negotiating your credit card debt. Right off the bat, know that negotiating your debt will negatively impact your credit.

What you're telling the bank is that you can't afford to pay back what you owe. So you're asking them to reduce the amount owed and the interest rate. The bank will report this to the credit reporting agencies.

Now, as promised, let's talk about how to negotiate that pesky debt of yours. By now you've come to the conclusion that it might be the only option for you, and that's okay. At least you're making an attempt to pay back your debt.

Step 1 - Get your affairs in order

The first thing you need to do is get a sense of how much debt you have. You'll also need to figure out how much you're spending each month on debt and other expenses. So put together a quick budget.

I suggest you write down every debt you have, the balance owed, and the minimum payment. I also recommend you write down how much you spend on basic needs, like gas, food, and utilities. More than likely your creditor is going to want this information.

Most banks won't even consider working with you if you can afford the payments. This should also be a reality check for you on whether you're attempting to live below your means.

Step 2 - Call your credit card companies and ask for help

Now it's time to ask for help. To skip through all the crap menus, use a free service like GetHuman to get right to a real person.

Whether it's the right person is usually a gamble, though. So I'd make sure to ask for someone in the credit or settlement department.

Once you're speaking with someone who can help, tell them you can't afford your payments. Let them know you're looking for help because you want to pay your debt back. This tells them you're not a deadbeat who's wanting to walk away from the debt.

I've seen plenty of people walk away from their credit card debt because they don't care. Most banks will appreciate when you're at least trying to make payments.

Remember, credit card debt is unsecured. So not paying it will destroy your credit. But in most cases banks can't come after your possessions, like your home. There are some legal loopholes here, so be sure to check with a lawyer or financial professional.

Most likely they'll want to know why you can't afford the payments. The'll then do a deep dive into your financial situation, so be ready for that. They'll pull a copy of your credit report will be as well, just to make sure what you're claiming is true.

It might help to get a copy of your credit report in advance if you're unsure about your debt situation. A free service like CreditKarma can help with that.

After going through your financial situation, they'll determine what options they have for you. It's normally one of these three:

1. Workout arrangement

They'll keep your card open but cut the credit line all the way down to the balance. This will increase your utilization ratio. They may even be willing to refund some past fees.

I've only seen this done when you can afford the payments and your credit isn't a complete disaster. But you'll still owe the full balance.

2. Forbearance

In my experience, this is pretty rare with credit cards. Just like a student loan forbearance, the creditor will allow you to skip a few payments.

The goal is that it allows you to get your financial situation together. Again, you'll still owe the full balance. But it might give you a little time to sort out some other financial mishaps.

3. Debt management program

If you're truly struggling, this is the most likely scenario. They'll close your credit card account and any other cards you have with them so you can no longer use them.

They will most likely reduce the interest rate and set you up on a plan to have the debt paid off in a specific amount of time. This may or may not damage your credit.

It will show up on your credit report that you're in a debt management program. I've seen this negatively impact a credit score.

The primary factor that is affected is your available credit. Once the bank closes the card, that available credit goes away. This increases your utilization ratio and (indirectly) hurts your credit score.

How to settle credit card debt

If still none of those options work for you, you can explore debt settlement. It should go without saying, but I strongly discourage you from going this route.

The only time I'd recommend it is if you're considering bankruptcy. Settling your debt will wreck your credit, but nothing like a bankruptcy will.

Settling your debt is like negotiating your debt, except you're after something different. If you're looking to settle your debt, you are saying you can't pay back what's owed. You're asking to pay back less than you originally charged up.

Here's an example:

Let's say you have a balance of $10,000 and you find you can't afford it (after trying the other options). You might be able to request to settle your debt at $6,000.

This means the bank would have to agree to "forgive" $4,000 of your debt owed and accept only $6,000. It might take some negotiation, though, and the bank still has the right to refuse.

In my experience, banks rarely settle on debt. Most of the time, they agree to settle when the balance is so far past due they're happy to get anything they can.

This is why you always see and hear ads for companies who will "settle your debt for much less than you owe." Basically what they do is have you give them control of your accounts and let them go way past due.

Meanwhile, they set you up on their own payment plan to profit from you. In the background, they're settling your debt for less than they're charging you. It's a total scam, and I can't urge you enough to stay away from these companies.

If you do come to a settlement agreement with your bank, they'll typically use one of two options:

With a debt settlement program, they'll set you up on a payment plan with the negotiated debt amount. For a lump sum settlement, you'll pay the full amount agreed upon in the settlement as one payment.

Any time you're settling your debt, it will hurt your credit. The bank closes your account and marks the debt as settled.

Your credit score will take a nosedive. So be sure to talk to a financial professional before making this type of decision.

Conclusion

I get that you may not be able to pay off your debt by living below your means and socking away extra money. But it doesn't mean you shouldn't at least try first.

Just do a Google search for people who have paid off huge amounts of debt. You'll find tons of folks just like you who have made extreme sacrifices to get rid of their debt the right way.

If this isn't an option for you, then explore some of the less credit-impacting methods I shared. If you're still struggling to get rid of debt, know that it's okay to call your creditors and ask for help.

Not everyone can be in a great financial situation, and that's understandable. The best thing to remember is that you're trying. Do everything you can to pay your debt off the right way, and learn from your financial mistakes.

Remember, before taking action, talk to a financial professional to understand your options.

Have you or anyone you know negotiated their credit card debt? What advice can you share?