How to Negotiate Credit Card Debt to Start the New Year Right
Negotiating credit card debt can be a useful debt relief strategy for a fresh financial start.
December 3, 2022
The beginning of a new year is a time for many to make goals and resolutions. Not surprisingly, learning better financial management is a goal for many — especially regarding credit card debt.
The average American carries $5,221 in credit card debt. If you have a balance on your credit cards, you may be looking for r ways to get out of debt. Carrying debt on your credit cards can harm your credit score, making it more difficult to secure loans or credit in the future.
Even if you cannot completely pay off credit card debt, you still have options for improvement as you start the new year, such as negotiating debt with your credit card company. Credit card companies would rather be paid a portion of your outstanding balance than none.
In this article, we’ll cover everything you need to know about how to negotiate credit card debt. We’ll start with the basics of debt negotiation and then dive into useful tips and suggestions that will help you negotiate with your lender so you can improve your personal finances in the new year.
Debt negotiations: The basics
Understanding how to negotiate credit card debt and other forms of debt will go a long way in helping you meet your financial goals this year. Understanding the basic principles of debt negotiation can help you figure out your options before you make a call to your lender.
Credit card debt can be particularly tricky because of high interest rates (otherwise known as the annual percentage rate). Credit card interest compounds, meaning the interest is added to your outstanding balance and you are charged interest on the now-larger balance. The longer you wait to pay off credit card debt, the more challenging it can become. On the other hand, the sooner you start doing this in the new year, the less you will owe in the long run.
Credit card issuers require minimum monthly payments on your balance. If you don’t make the minimum payment by the due date, you may incur late fees and penalty APRs, increasing your balance.
If you don’t make any payments for 180 days, the issuer can do a charge-off of your account, which means the company files a report saying it has tried to get you to pay the money and has closed your account. This can significantly hurt your credit score, and you are still responsible for making up the missed payments. The lender could also sell your debt to a collection agency.
However, lenders offer special payment plans, such as hardship plans, to help chip away at your debt. But suppose the outstanding balance is large enough and your credit card company recognizes they may not receive the full amount of the outstanding balance. In that case, they may be willing to negotiate a lump-sum settlement.
With this settlement, you pay an agreed-upon portion of the outstanding balance. The rest is considered forgiven debt.
Let's say you have a balance of $10,000 on your credit card. You negotiate a debt settlement with your credit card company, agreeing to a lump-sum payment of $3,000. You pay this amount in an agreed-upon time frame. The remaining $7,000 balance is waived.
One of the reasons credit card companies are willing to negotiate debt is because it’s unsecured, as opposed to secured debts, which are backed by collateral. For instance, a mortgage is backed by the equity you have in your home. Debt collectors can come after your assets if you fall behind on payments.
Credit cards, on the other hand, are generally unsecured debts (though there are some secured credit cards). Because the debt you have on a credit card is not secured, lenders can't come after your assets if you don't pay. That’s why credit card companies may be open to debt negotiation: They are more comfortable collecting a portion of your balance than not receiving anything.
Lastly, if you can't negotiate a lump-sum payoff, there are other conditions you can negotiate for that would still benefit your finances. For instance, you could negotiate a temporary pause in your bill payments (known as forbearance), a lower interest rate or a repayment plan. We'll explore these options a bit more below.
How to negotiate credit card debt
There are two ways you can negotiate credit card debt after you’ve made it one of your New Year’s goals.
Go through the process on your own
Work with a debt settlement company or a credit counselor
Debt settlement companies and credit counselors are professional debt negotiators, but they usually charge additional fees.
Though every scenario is unique and dependent upon your financial situation, you may want to try negotiating a debt management plan with your credit card company first. If unsuccessful, you can reach out to a debt settlement company to negotiate on your behalf as a last resort.
Before you call your credit card company, have a script in place. If you have a history of making on-time credit card payments or are a long-time customer, you'll want to bring these facts up in the conversation. You need to explain why you are a candidate for debt relief. Perhaps you’ve experienced a financial hardship (such as a job loss or a medical emergency) and need assistance. Don't be afraid to make your case to your lender.
The customer service phone number should be on the back of your card. When you call your credit card company, ask for the department responsible for collections and debt settlement. Once you are transferred to someone in that department, state clearly what you’re looking for.
Examples include a:
Lower interest rate or a zero interest rate, known as a workout agreement
Hardship program for situations such as job loss or divorce
Waived fees and waived increased APRs associated with late payments
The first answer you get may be "No," and you may have to call back a few times before success. But that doesn’t mean you should get discouraged. Being persistent is necessary when you are negotiating credit card debt.
Tips and suggestions for successful negotiating
As with any other New Year’s resolution, you’ll be more successful at achieving your debt reduction goals when you know the best practices for negotiating credit card debt. The following tips can increase your odds of success at settling debt with your lender:
Knowing how much you owe
Before you call your credit card company, understand your financial situation, including available credit and current credit card balance. You should also know the interest rate you’re paying on your card. This will make for a much clearer conversation during negotiations.
Write down everything said, including the names of the people you spoke with during your phone calls. If you find someone who is willing to negotiate, ask them to send you the terms and conditions of the deal in writing or via email. The agreement you negotiate is legally binding, so you need to know what you’re entering into.
Furthermore, the person you spoke with may one day leave the company, and your debt could be accidentally sent to a collection agency. Getting everything documented in writing will help you in the long run.
Understanding the downsides
Though getting out of debt is helpful, there are some potential drawbacks from negotiations. If you negotiate your debt, your credit card company may prevent you from using the card until the full balance is settled.
As a result, your credit utilization ratio may increase due to less available credit, which means you’re using a larger percentage of your available credit. This will show up on your credit report and could temporarily lower your credit score. Your credit card company may also report any debt settlement to the credit bureaus, potentially lowering your credit score.
Lastly, there are tax consequences associated with credit card debt settlement. The IRS treats any forgiven debt greater than $600 as taxable income. So you'll owe more in taxes than you normally would.
What to do if you can't negotiate your debt
If you aren’t able to negotiate your credit card debt, you don’t have to give up on your New Year’s goal quite yet. There are a few other options available. Consider looking into balance transfer cards or debt consolidation loans as possible means of getting out of debt.
Additionally, you may find credit counseling agencies that offer debt management programs for a small fee. These professionals can help you manage your debt and may be able to negotiate on your behalf. Note that these are different from debt settlement companies because you don’t settle your debt directly with them. Instead, they help you find the best options for dealing with your current debt.
Another option you have is Tally†. Tally helps you pay off your credit cards quickly and efficiently by combining your debts into a single monthly payment. The app is automated, and you'll always make your minimum monthly payments on time. While the app won't negotiate down the total amount you owe, it will help you pay it off faster.
Negotiate your balances to help get out of debt for the New Year
If you carry a credit card balance that you just can't seem to get rid of, learning how to negotiate credit card debt with your lender could be key to meeting your financial goals for the New Year. Because most credit card debt is not secured, lenders may be willing to negotiate to ensure they're paid at least some of what you owe.
When negotiating, clearly state what it is you're looking for. Don't be afraid to keep trying if you’re unsuccessful after your first or second attempt. Even negotiating down a little bit of your balance or lowering your interest rate can save you a lot of money in the long run.
If you still have some credit card debt remaining after negotiating, a credit card payoff app like Tally can help you manage your debts so you can improve your finances in the year ahead.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.