We took a look at negotiating your credit card debt (link opens in new window) in a previous article. But is there a positive spin to it? Can you actually make something good out of negotiating credit card debt?
My strong answer is YES – and here below are a few benefits from negotiating with credit card debt:
- if you’re successful, you saved yourself the risks of running the process through a creditor counseling service and the trouble with that when communication breaks down
- negotiating over money issues is a test of skills and persuasion power – coaching and classes to teach you this are among the most expensive in the field of personal improvement
- believe it or not, if you make a good point and keep your end of the deal, the relationship you are building with the credit card company (through the representative you are talking to directly) will be stronger and based on results and struggling through hardship together; this might not mean immediate benefit to you, but reps are human too – be nice to them and they might remember your name when they have an opportunity that suits your profile
- success breeds success – if you managed to negotiate down with credit card debt, what is to stop you from repeating the process with your car loan or even mortgage?
- many will tell you debt settlement visible in your credit report might deter lenders from extending credit to you because you’ve been given a settlement in the past; true, BUT…. since it is not difficult at all to repair your credit report you can turn even this last con into a pro – just think what bargaining power it gives you to enter a second or third negotiation meeting with a creditor with the proof of you previous settlement out there; it spells out “this is your chance of getting some money off me and avoid future losses” and financial companies know how to take on that chance right away.
Negotiating credit card debt reduction is not as difficult as it seems. You can negotiate a reduction with your credit card company or you can deal through a non-profit counseling service which can manage the process for you. Either way, you must start with a clear goal in mind and be aware of the importance of keeping your end of the deal.
Credit Card Debt Assessment
1. Retrieve the latest outstanding balance from your credit card statement. This shows how much you owe to each credit card issuer(s).
2. Identify the current interest rates and APR on each credit card – You might be paying different interest rates on certain portions of your outstanding balance. If that is the case, your statement will show each interest rates as well as the APR which reflects the total amount of interest you are being charged over a period of 12 months.
3. Note the current minimum monthly payment on each credit card – While this is usually 3-5% of your outstanding balance, the minimum payment can change from month to month due to charges or payments to your credit card.
4. Do you pay finance charges on your credit cards? – This might require you retrieve your monthly statements from prior months and average the total charges you pay monthly for each CC. If you did not archive your previous monthly statements, you should be able to get the figure from your credit card company – simply call them and ask the representative to break it down for you for at least the last three months.
5. What is the maximum amount you can afford to pay on your credit card debt each month? Review what you have paid each month for the last three months. Are you directing funds to other accounts that you could as well use for repaying your credit card debt? Can you curve your spending in order to pay your debt faster?
Negotiating Credit Card Debt Reduction – Who does it?
You can do your own negotiations with your credit card company or you have the option to work with a credit debt negotiation service or debt reduction service that can represent you. Using a service might be reflected on your credit report, but also prove more effective; those familiar with handling finances can try debt reduction negotiation themselves with the help of resources listed on this blog.
No matter who you choose to do the negotiation, you have the option to reduce the amount of debt by either:
- working on your current debt
- reducing the future debt
Negotiating Down Current Credit Card Debt
Open the negotiation by finding the right person to talk to. Throughout the conversation remember to remain calm, polite and gentle, but nevertheless assertive. After introducing yourself and establishing your identity, ask “Can I negotiate my credit card debt reduction with you or will you be so kind to transfer me to the right person in your company?” so that you are put through to the representative who has the authority to negotiate and approve a debt reduction on behalf of the credit card issuer.
If you have a short-term problem and are not able to meet the minimum payment you can ask for assistance from the credit card company. They may be willing to either:
- Give you temporary “hardship” help by lowering your monthly payment for a short period time (like three monthly statements) to give you a chance to get back on your feet financially
- Establish a repayment plan for 36 to 48 months during which you can spread your existing debt. This can lower your monthly payments and allow you to pay off all the debt with a lower interest rate than you would have been charged without the repayment plan.
As we have seen in an earlier article, credit card debt in unsecured. While difficult for them to recover the full amount from you if you default, credit card issuers prefer to receive the full amount that you owe – not to reduce the total debt you already owe. However, if you are not able to pay off the debt, the issuer may be willing to reduce the debt so that they can at least get part of the outstanding balance paid. You will probably have to prove that:
- You are unable to pay all of the debt. Your credit card company may ask you to submit information about your finances such as proof of income or copies of bank statements or prior tax returns.
- You are willing to make a commitment to pay off the debt. Offer to have the minimum payment automatically removed from your checking account each month.
Some credit card companies are ready to negotiate down the current debt by 30 to 50 percent and find it acceptable instead of dealing with the hassle of recovering their money through other means. As with any negotiation, start by asking for a larger reduction before accepting to settle for a smaller advantage. Always remember the basic rule of negotiation – every time you must give something, ask for something else in return. Once the other party accepts negotiating with you, regardless of how solid their position seems, they confirmed that they want to reach an agreement. Do not, under any circumstances, break the talks abruptly. You do not have to finish negotiating your credit card debt in one conversation – ask for time to review the situation and analyse your financial status and arrange for a follow-up meeting. Do no overdo it, though – the other party is also human and his or her patience might run thin if they suspect your are not willing to meet halfway.
Reducing Future Debt
Many will the you the easiest way to prevent future debt from accumulating is by cutting your credit card with a pair of scissors and relying solely on cash. The vivid imagery belongs in sitcoms and “get out of debt in three day” websites – it is not ideal nor realistic either. Under no circumstances prefer to cancel your credit card account instead of controlling your use of it. You want to keep it open since that it will show that you have available credit, which will help your credit score. It will also come in later, when I will show you how to actually make money with credit cards.
Negotiating a lower interest rate is not difficult. You may be able to negotiate a lower interest rate if you have a good credit score and a good payment history.
It is not uncommon for a cardholder to receive an interest rate reduction of seven to ten percentage points. Here are a few tips for negotiating credit card rates:
- Attack the problem from one angle at a time. Remain polite but persistent. If they are not moving on your good payment history, review their position on the market. Ask them to explain how they see the problem – if they would prefer to see their money back in steady repayments or in a lump sum just before you went away.
- After you are offered a lower rate, ask the rep what will it take to get an even better rate. Do not accept an advantage in the first flavor server: ask for a lower rate for six months once you got a lower overall rate.
- Try to get a lower rate if you set up automatic payment from your checking account.
- Beware of talking to the wrong person – make sure you asked for the full contact details of the representative you are talking to and do no delay asking to talk to his manager if you see that he/she would not budge. Remain polite and assertive.
If the whole process remains unfruitful you retain the option of using a creditor counseling service – the service will usually offer you a free assessment and charge you a fee which is based on the amount of savings they are able to negotiate for you.