How to Negotiate Debt Settlement with Credit Card Companies

August 10, 2010 2 Comments »

The financial meltdown caused by the subprime mortgage crisis of 2007-2009 painted a vivid picture of the risks that can materialize when financial institutions advance credit for overpriced properties to unworthy applicants. The subprime mortgage crisis also brought to the fore decades’ long debt problems that have been simmering among many individuals and families in the US. The single largest source of personal and household debt has been the credit card. Credit card debt has not only been a source of stress and sleepless nights but has also been among the leading causes of bankruptcy in the US.

Needless to say, ending up in credit card debt is something that each person would rather not experience. However, if you do find yourself falling into credit card debt, negotiating a debt settlement is one of the first responses you should take. This isn’t to say debt settlement is easy (or even achievable). To be successful the negotiation process has to be a well thought out and systematic approach, preferably supplemented with any available leverage you possess. So how can you plan for the process of credit card debt settlement negotiation?

Know your debt balance

It is a somewhat shocking fact that many Americans in debt simply do not know the actual amount they owe to their credit card company(s) – and/or often unwittingly underestimate the amount. So the first thing you must do is obtain a current card statement. Wherever possible – get clarity or a breakdown of the outstanding amount from the credit card company. This will help you fully understand by how much you may have over shot your credit card limit. It will also provide you with an idea of what constitutes the over limit charges, late payment fees and interest. When you can clearly separate the different components of the outstanding balance, your in good place to begin negotiation. So to begin a negotiation you could, for instance, state your willingness to promptly pay the actual outstanding amount and then negotiate the reduction or elimination of the late payment fees and interest.

Inform your bank of financial difficulty

One of the biggest mistakes one can make once they fall into credit card debt is to evade credit card representatives by refusing to answer their calls. Getting in touch with the credit card companies representative must be one of the initial steps you take in jump starting the debt settlement negotiation. Take time to explain to them the financial changes that have taken place in your life that are preventing you from paying back the full debt and allow them to offer you solutions. Remember – the credit card company realizes that credit card debt is an unsecured loan and will usually have a set of potential solutions at hand for clients that run into personal financial difficulty.

Highlight the possibility of filing for bankruptcy

Simply put – credit card companies do not want their clients filing for bankruptcy because many forms of bankruptcy allow little opportunity for credit card companies to receive outstanding debt payments. The credit card company would rather have their client settle part of the debt than get nothing back at all. By mentioning your intention to file for bankruptcy, this puts you in a good position to negotiate a settlement and ushers in a bit of leverage. That said, make sure you communicate your intention in a way that does not come across as covert blackmail!

Offer to pay a lump sum amount

You must show your commitment to settling part of the debt. By offering to pay a lump sum, you give the credit card company confidence that you have no intentions of defaulting on payments in the future. The card company will likely be more willing to give you a lot more leeway in how you can settle the debt.

Workout other arrangement(s) with your bank

Among the biggest drivers of burgeoning credit card debt are late payment fees and over limit charges from maxing out your credit card limit. The credit card company may agree to temporarily freeze these charges in order to give you time to recover from your current financial constraints. The agreement may also include lowering of the interest rate levied on the outstanding balance. You may also negotiate for forbearance which means you hold off making any payments on your credit card debt for a specific duration (usually a few months) until you are able to clear the debt. The flip side is that the arrangement will usually be on condition of prohibiting you from further using your credit card. There may also be an impact on your credit ratings but this will depend on the type of information the credit card company chooses to relay to the credit rating bureaus.

Negotiate for all of the components of your debt

During negotiations, you should not forget that you not only want to settle your debt but also keep your credit rating at a decent standing for the future. Therefore, do not be afraid to request that the card company not include or report your late payment records to the credit reference bureaus. The inclusion of such data can set your credit rating back substantially and may make it difficult to get any significant credit in the foreseeable future.

Discourage the incorporation of collection agencies in the process

Once you have ironed out a workable agreement on the modalities for settling the outstanding debt, you should request the credit card company not to sell the debt to a collection agency. Collection agencies will often increase the fees and charges. The involvement of a collection agency will almost certainly see a negative notation make its way to your credit data thus drastically affecting your credit score.

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