According to recent studies, the average credit card balance in America is $6,194, with $1,155 in retail card balances alone. With interest rates averaging 16.61%, it’s easy to see why so many are drowning in credit card debt! Sound familiar? If you have credit card debt that is in collections, it’s smart to learn how to negotiate it down.
Credit card debt was the “straw that broke the camel’s back” in my household. When we moved to Texas in 2016, our credit card covered expenses like the moving truck, food for the drive, and the initial setup at our new apartment.
Instead of using it solely for the move, we continued swiping. In November 2016, we made an impulsive $700 purchase that we couldn’t afford to pay off that month.
That moment was our “oh crap” moment. I realized that we were living outside of our means, unable to afford what we were purchasing. It was a terrible feeling. It was then that I decided to fully commit to paying off debt and seek financial independence.
That’s why I am so passionate about getting out of credit card debt! It’s what prompted me to make the necessary changes for my family to be where we are today.
Related reading: How We Paid Off $71k Of Debt in Less Than 3 Years on a Single Income
If my story sounds anything like yours, or you’re drowning in stressful credit card debt in collections, you need to keep reading!
What to Consider Before You Negotiate Your Credit Card Debt
Typically, I would advise paying off credit card debt using the Debt Snowball Method. With that being said, if you are in the position where your credit card debt is in collections and you cannot pay the balances off in full anytime soon, negotiation is an effective way to get out from under your amount owed.
What to Do Before You Call Your Credit Card Company
Know where you stand in terms of amount owed, monthly payment amount, and interest rate.
In addition to knowing your credit card debt numbers, you should also know your monthly income, annual income, and what your other debts are.
It will also help to know where your credit card debt is. If your credit card company, let’s use Discover as an example, has sent your debt to collections, that means that they have sold off your debt to another company.
This means that you won’t be negotiating with Discover, you will be negotiating with the collections company Discover sold your debt to. For more on the debt collections industry, check out John Oliver’s segment from Last Week Tonight. Warning: adult language.
Now, Let’s Negotiate that Debt. Here are the 4 Main Types of Credit Card Debt Negotiation:
After you have the “big picture” of your credit card debt, the next step is deciding which negotiation tactic is best for you.
The first thing to note with the lump-sum negotiation tactic is that you must have the lump-sum money upfront. That is how you negotiate with this settlement tactic. If you settle your credit card debt for $4,000, you must pay all $4,000 upfront. The cash must be ready to go before you settle!
Dave Ramsey is a huge proponent of settling credit card debt because you can negotiate for cents on the dollar.
For example: Let’s say you owe $8,000 on your Discover credit card. You haven’t paid on your balance in 6 months. Because of this, Discover sold your debt to a collections agency.
You have the ability to ‘settle’ the $8,000 debt for a lump sum of $4,000. That’s $0.50 on the dollar of what you actually owed! It will take calling and harassing the companies, but persistence usually pays off.
Typically you can easily settle for $0.50-$.90 on the dollar of your amount owed. The more delinquent the debt is, the more eager they’ll be to settle for a low amount.
Let’s look at another example: If you owe $10,000 on your credit card, you can call the collections agency and settle this debt for $0.70 on the dollar– meaning, you have the opportunity to settle and pay it off in full for $7,000. With paying $0.70 cents on the dollar, you end up taking care of your debt for a fraction of the original amount.
The important thing with lump-sum settlement, and any type of settlement, is to get everything, and I mean everything, in writing. These collections companies are not your friend, and they will come back and attempt to collect from you again.
Also, don’t give them access to your bank account. Make sure the agreement allows you to send in a cashier’s check, money order, or some other payment method so they don’t have access to your personal account information.
Write down everything discussed, don’t be afraid to ask for a supervisor, contact them again and again until you are able to reach a compromise. Then, get the agreement in writing. Always, always, always ask for documentation before you pay up.
If you have debt in collections, money on hand, and have the ability to get rid of this debt “once and for all,” this is the best option for you.
Lump-Sum Settlement Script:
“Hello! I owe $______ (balance owed) on my credit card and I’m having some trouble paying it. I don’t have $______ (balance owed) to pay it off, but I can pay $______ (lesser amount, $.50-$.90 on the dollar) to settle it in full today. Would that be something you can do?”
Can you settle credit card debt if it’s not in collections yet?
Credit card companies want your money, in full. And to be fair, you owe it. If your account(s) is not in collections, settling for lower than what you owe will be difficult because it doesn’t benefit them at all. You owe them money, and they’re still hoping to get it in full. There are some debt settlement companies that advise you to skip payments so that your lender is more likely to settle on a lump sum agreement, however, it is important to note that late payments will damage your credit score.
I don’t recommend that. If your debt is not in collections, it’s best to just pay it off in full ASAP using the Debt Snowball Method.
A workout agreement is exactly as it sounds, you work something out with the credit card company to make it easier for you to make payments that work within your financial means. This typically comes in the form of:
- Lowering your interest rate
- Waiving late fees or related credit card fees
- Reducing your minimum monthly payment
Adjusting these variables with your credit card debt can make a world of difference in your bottom line and make it easier for you to get ahead of your credit card debt. It may also make it easier for you to pay off your credit card debt faster, meaning no more high interest rate fees every month.
If you have a workable amount of credit card debt, but just need some help making it easier for you to pay off, this is the best option for you.
Remember: Get everything in writing.
Hardship relief programs are common within most credit card companies. If you have experienced job loss, a furlough, serious injury or illness, call your credit card company and explain your individual circumstances.
Most of these companies will work with you, especially if you explain that you are a loyal customer wanting to do the right thing and pay back the debt you owe.
You may be able to lower or waive your monthly payment or reduce your interest rate for a set amount of time. This type of negotiation will also more than likely include a strict repayment plan.
If you are experiencing a “life whammy,” this is definitely an option that you should consider.
Remember: Get everything in writing.
0% Credit Card Transfer
This option is great if you’re not behind on payment and plan to pay off your credit cards in full ASAP, but you need a little help avoiding killer interest rates.
If you have the ability to pay off your credit card debt, but you have an exorbitant interest rate on your card, you can use the 0% transfer credit card balance technique.
This means that you open a 0% APR credit card and transfer the balance from one card with a high interest rate to the one with the 0% interest rate.
Typically these cards have 0% introductory interest rates for a limited time, around 6-18 months. If you have the financial ability to pay off your credit card debt within that strict time frame, transferring may be the right option for you.
Risks to Be Aware of Before You Negotiate Credit Card Debt
Credit card negotiation is not risk-free, and it’s important for you to understand the possible negatives when going this route.
Some lump-sum agreements will negatively affect your credit score. Debt settlement information will stay on your credit report history for seven years. Negotiating a lump-sum agreement can potentially drop your credit score by 45-160 points. The effect your settlement has on your credit score will decrease as time goes on, until it eventually ‘falls off’ your history.
I realize that this is an extensive range, however, this is calculated by many factors including your past credit history, If you have been in a debt settlement situation before, late payments, etc.
Your credit score will also be more drastically affected if you are settling on more than just one account.
The credit bureaus are pretty tight-lipped about how exactly FICO scores are calculated, but when you are settling lump-sum, this is the type of negative repercussion you can expect.
With a workout agreement, your credit line may be cut which will lower your credit utilization percentage, and again, this will negatively impact your overall credit score.
With the hardship option, your payments are deferred, not forgiven, so you still have the responsibility to pay the amount owed.
When transferring your high-interest credit card debt to a 0% interest rate card, it is for a limited time. If you do not pay the credit card debt back, you could begin being charged even more interest than the card you transferred it from.
How your credit card company reports these varying events to credit bureaus will determine how they affect your credit, and determine if there are tax ramifications.
Other Essential Info to Know Before You Negotiate Credit Card Debt
Each credit card negotiation option has pros and cons to seriously consider. When you are negotiating credit card debt, it is important to get everything in writing and ask as many questions as you can so that you understand the terms of the agreement fully.
Negotiating credit card debt has the potential to completely change your debt-free date and make it easier for you to reach financial freedom.
Have you successfully negotiated your credit card debt? If so, what was the option that you used? Let me know in the comments below! Have any questions? Reach out! I love to chat!