Guide to Negotiating your own Credit Card Settlement

Many people think of credit card debt as non-negotiable.  The credit card company holds sets the interest rate and other conditions, you use the card if you agree to those conditions, and what you end up owing is what you owe.  A deal’s a deal.

They don’t realize – which is good for the credit card companies – that in fact there’s plenty of room to haggle.  Renegotiation of credit card debt is often available for those who push for it.  Millions of people every year reach settlements with their credit card companies to get a break when they’re in trouble.

Why do the credit card companies agree to settlements?  Why don’t they hold out for every penny to which they’re contractually entitled?

Well, it’s generally not out of the goodness of their heart.  Maybe, occasionally, on an individual level you might run into a representative who wants to help because they genuinely feel bad that you’ve lost your job and are in financial difficulty through no fault of your own.  But no, it’s typically a simple matter of corporate self-interest.

From their perspective, getting some money is better than getting none.  So what they’re looking at is “If we don’t deal, is this person in such desperate straits that they’re willing to further blow up their credit score by stiffing us?  Are they in so deep that they’ll declare bankruptcy or simply ignore their creditors and accept the consequences of such irresponsibility?”  Their goal is to ease the pressure just enough that you’ll not feel driven to go to the “nuclear option” of stiffing them outright.

Thus the reason they would not insist on every penny to which they’re contractually entitled is if they see they aren’t going to be able to collect that whatever they do.  In that case they’ll try to get the most that they can instead.

So let’s say you want to make a deal.  The first thing to consider is when to attempt to renegotiate.

It’s possible to do so anytime, but as a rule, when you’re in the fairly early stages of falling behind on your payments is when a credit card company will be most receptive to working something out with you.

If you’re up to date with all your payments, and you contact them to try to get a better deal because you anticipate struggling to make the payments in the future and you want to head off that problem, there’s a pretty good chance they’re going to tell you to wait and cross that bridge when you get to it.  From their perspective, your account’s been generating money for them consistently with no problem yet, so they’re inclined to keep the rules as they are until that changes.

On the other hand, let’s say you’re way, way behind on your payments, you’ve repeatedly failed to fulfill the obligations you agreed to, maybe you refused to talk to them when they tried to contact you, or you lied or found some other way to stall, to where you’re pretty much a deadbeat in their eyes.  If you come to them now wanting to deal, they may not be all that receptive, because you’ve burned your bridges, you’ve given them no reason to think you’d fulfill any new agreement.

So it can be too early, and it can be too late.  The best time is in between, when they see there’s a problem, they see that you’re not able to pay what you’re supposed to, but they haven’t yet completely lost faith that you can be a reasonable person with whom to negotiate who generally will follow through on your agreements.

Next, should you do the negotiating yourself, or go through an entity that promises some kind of credit counseling or debt relief?

Really though, that divides further into three options: Should you do the negotiating yourself, should you work with a for-profit company, or should you work with a non-profit organization?

Almost always the worst of the three options is to deal with a for-profit credit relief company (or a nominally non-profit one that’s actually related to a for-profit entity – you have to investigate these things carefully).  There may be a few legitimate such companies, but this is an industry with a terrible reputation for a reason.  They know they’re dealing with people who often aren’t the most savvy about money matters, and they exploit that.  Typically all that happens is their fees get added to the financial burden you were already struggling with.  Often they take a hefty fee up front, money that could have gone toward your credit card debt.

Either of the other choices is fine.  You should only handle matters yourself if you’re confident in your negotiating ability and you’re willing to educate yourself about the process.  Often it’s best to work with a non-profit consumer group that helps with people having problems with debt.  An umbrella organization for such non-profit credit counseling services is the National Foundation for Credit Counseling.

Next comes the question of what should be your goal in the negotiations.  It’s easy to say just that you want to replace your current deal with the most favorable deal you’re able to get, but there’s a little more to it than that.

The main thing you’ll want to keep in mind is that different forms of relief have different implications for your credit score.  All else being equal, you prefer the kinds of relief that don’t further damage your credit.

Among the things that typically won’t show up adversely on your credit report are alterations in fees, interest rate, and minimum payments.

Let’s say you owe $3,000 on your credit card, you’ve racked up $300 in fees since you got in the hole, you’re struggling to pay even the minimum payment of $60 a month, and the credit card company has exercised its right to bump your already high 15% interest rate to 25% once you missed a payment.  If you contact the credit card company, explain your situation and what you’re willing to do, and you and they come to an agreement to waive the $300 in fees, drop the interest rate to 5%, and drop the monthly minimum payment to $30, that will help you considerably without anything showing up as a negative on your credit report.

But among the things that hurt your credit are having a credit card company cancel your card, and especially failing to pay the principal that you owe.

So let’s say that in the above scenario, you instead reach a deal where the credit card company agrees to accept $1,500 in a lump sum now and not go after you for the other $1,500, and they cancel your card.  That shows up on your credit report as your having stiffed them for $1,500 (even though they’re not pursuing it), and having a credit card cancelled by the issuer.  That looks really bad, and will drop your credit score down considerably.

Not that it’s always a bad option to get out of a debt with a partial payment like that, but you should understand all the implications of doing so, and should seek first to obtain a comparable amount of relief in other forms that don’t hurt your credit.

Let’s close with a couple other quick notes on credit card settlements.  First, make sure you get everything in writing.  If you’re told something on the phone, or you reach an agreement with someone on the phone, have them send verification of it in writing, otherwise you can’t prove it ever happened.

Second, really try to stick to any agreement you make.  If you go back to missing payments, if you don’t hold up your end of the bargain, they’re free to breach too, and you’re back where you started, piling up fees and such again.  Plus it’ll harder to renegotiate next time, because you’re just providing them further evidence that you cannot be relied on.

In conclusion, if credit card debt is overwhelming you, don’t be shy about contacting the credit card company and letting them know that you’re in a tough situation, and that you want to pay them what you realistically can but aren’t going to be able to keep up with your current obligations.  Often they’ll be amenable to working something out with you that gives you at least some degree of relief.


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