Key takeaways
- If you find yourself in too much debt to keep up with, you might be able to negotiate with your credit card issuer to settle some of your debt.
- Debt settlement works by negotiating with an issuer until they agree to let you pay off part of your debt in exchange for forgiving — or settling — the rest of it.
- The process might include paying a portion of your debt upfront or going on a structured payment plan for a set period of time — and it’s not without consequences.
- Debt settlement isn’t the best option for everyone, so make sure you consider alternatives like using a balance transfer card or creating a debt management plan with a credit counselor before you call your issuer.
Credit card debt can accumulate faster than many people anticipate — and once it starts piling up, it becomes increasingly challenging to pay down. The average credit card balance in the U.S. climbed to $6,501 in 2023, as reported by Experian. This amount is 10 percent higher than the previous year’s average balance of $5,910.
If you have been relying on credit cards to stretch your finances, only to witness your credit card debt grow and grow, you may feel like there is no end in sight. Fortunately, there are options available to you, including negotiating your debt with credit card companies. This can help you regain control of your finances and prevent further damage to your credit score.
Why credit card companies negotiate debt
During financial hardships, credit card payments often take a back seat. Unlike auto loans or mortgages where your assets are at risk, most credit card debt is unsecured. However, neglecting credit card payments can still have serious consequences on your credit. Late payments can negatively impact your credit score and remain on your credit report for several years. Moreover, defaulting on a credit card bill could lead to legal action by debt collectors, exposing you to additional risks.
Credit card issuers understand that unsecured credit card debt may not be a top priority for individuals facing financial challenges. Rather than risk non-payment or bankruptcy, a card issuer may be open to negotiating your credit card debt to recover at least a portion of the owed amount.
Credit card issuers also have a vested interest in retaining you as a customer, which may motivate them to negotiate in order to maintain a long-term relationship or prevent missed payments.
How does credit card settlement work?
Credit card settlement is a form of debt settlement that allows you to repay credit card debts for less than the original amount owed. This process can be initiated independently or through a third-party agency, commonly known as a debt settlement company.
Using a debt settlement company
These companies negotiate with creditors on your behalf to reduce your outstanding debts. Subsequently, a payment plan is established to settle the remaining debt. You are required to make payments to the agency, which in turn disburses the funds to your creditors. It is essential to exercise caution with debt settlement companies as not all are transparent about their fees, and you could potentially end up in debt to the settlement company after clearing your debt with the issuer.
Settling your debts on your own
If you prefer not to engage a third-party agency, you can directly negotiate with your credit card issuer. Many issuers offer hardship programs, and some may agree to reduce your interest rates for a specified period as you work towards debt repayment.
While credit card settlement offers the benefit of quicker debt elimination without the burden of the full debt amount, it is important to note that your credit score may suffer as a consequence. Additionally, there may be tax implications in the future. For instance, settling a $15,000 debt for $10,000 could result in taxation on the $5,000 difference, leading to the issuance of a 1099-C cancellation of debt form.
Bankrate’s take: Settling your debts yourself doesn’t mean you can’t ask for help. Working with a certified credit counselor from a nonprofit agency can be a great first step in putting together a plan to negotiate with your card issuer.
Types of credit card debt settlements
Card issuers are likely to agree to one of three types of settlements. The best one for you depends on your current financial situation.
Lump-sum settlement
With this negotiation technique, you offer to settle your outstanding debt in one big payment, albeit for less than your balance. For example, you might owe $4,000 between charges, interest and fees on your credit card, but you ask the bank to accept $2,500 to settle the account in full. If the card issuer accepts, it will forgive the remaining balance.
Lump-sum settlements have two potential downsides. First, a notation may be added to your credit report showing that the account was “settled for less than the full balance.” This could be bad for your credit score. However, if your account was already past due, the notation may not cause additional damage. You also might have to claim the forgiven debt as income on your upcoming tax return and potentially pay taxes on that amount, so if you go this route, it’s a good idea to start saving toward those tax payments.
Workout agreement
A workout agreement typically involves your credit card issuer lowering your interest rate or temporarily waiving interest altogether. The bank may also be willing to take other steps to make it easier for you to keep up with your debt, including reducing your minimum payment and potentially waiving past late fees on your account.
On the other hand, your card issuer may close your account as part of the arrangement. Although your credit score is likely already damaged from late payments, closing your account (and thus wiping out your available credit limit) could raise your credit utilization rate. Credit utilization is responsible for up to 30 percent of your FICO Score, so if your credit utilization increases, your credit score may drop further.
Hardship agreement
Sometimes called a forbearance program, a hardship agreement may be an option if your financial setback is temporary. If you were to suddenly lose your job or have an unexpected illness or injury, you should call your card issuer right away to see if it offers a hardship program.
With a hardship plan, your card issuer may agree to lower your interest rate, suspend late fees or reduce your minimum payment on a temporary basis. You might even be able to skip a few payments while you work to rebound from the financial setback.
Unfortunately, your credit history and scores could still be at risk with this type of agreement. Depending on the terms of the bank’s hardship agreement, it may report negative information to the credit bureaus during the forbearance period.
How to determine if you should negotiate your debt
If you have credit card debt that you are looking to settle with the credit card company, consider a few factors first. First, explore other options like credit counseling or bankruptcy. Either of those may be a better fit for your specific situation.
Second, consider whether the credit card issuer will even be willing to negotiate with you. Many issuers won’t negotiate with cardholders unless they’re several months behind on their payments already. The credit card company will also want to make sure that you have the financial ability to pay any settlement. This could be a lump sum or enough monthly cash flow to fulfill your settlement obligations.
How to negotiate credit card debt
Negotiating with credit card companies can be tricky because many will likely be reluctant to change their terms unless they are worried about you filing for bankruptcy. Whether you choose to negotiate credit card debt on your own or hire a professional to represent you, it’s best to come prepared to negotiate. Start with the following steps:
- Confirm how much you owe. Before credit card negotiation begins, check your account balance online or call your card issuer to discover your current balance. It’s also wise to confirm the current interest rate on your account, especially since you may be getting charged the issuer’s penalty APR as opposed to their regular APR.
- Review your options. Decide if a lump-sum settlement, workout agreement or hardship agreement makes the most sense for your circumstances.
- Call your credit card issuer. If you’ve decided to handle negotiations on your own, call your credit card company and ask to speak with the debt settlement, loss mitigation or hardship department; a general customer service representative won’t have the authority to approve your request. Once you’re connected with someone who has the ability to negotiate with you, explain your situation and make your offer. Be polite but firm.
- Outline your terms. If you’re considering filing bankruptcy or hiring a professional to help you with your debt, let the card issuer know and mention that you’d rather work things out directly. At this point, be prepared for the card issuer to potentially freeze your credit limit or close your account.
- Take detailed notes and follow up if needed. If you like, you can opt to record the call, although some states require you to let the card issuer know that you’re recording the call and vice versa. Don’t be afraid to ask for a supervisor or call back multiple times over the coming days and weeks if you’re unhappy with the terms being offered.
- Get the agreement in writing. If the card issuer agrees to a settlement or arrangement that you’re happy with, ask for documentation. You don’t have a deal until you have it in writing.
Getting help with credit card debt
When you’re overwhelmed with credit card debt, it might help to have a professional work on your behalf. In general, there are two types of companies that may be able to negotiate with credit card companies for you: debt settlement companies and credit counselors.
Debt settlement companies
Debt settlement companies are for-profit businesses that will try to negotiate lump-sum settlements with your creditors. Typically, you stop making payments to your creditors and start sending funds to your debt settlement company each month to build your account.
Once your account with the company grows large enough, the company will call your card issuer and make an offer to settle the debt for less than you owe. If the bank accepts the offer, the debt settlement company sends the funds to your creditor and takes a cut for its services.
Cost of debt settlement companies
Debt settlement companies can potentially save you time and money, but there are potential issues with this approach. First, if you stop paying your credit card company, it will report late payments to the credit bureaus. The account may eventually be charged off, sold to a collection agency or worse. All of these actions can have serious consequences where your credit is concerned. There’s also no guarantee that your bank will be willing to negotiate, so you could end up with ruined credit and even more debt.
Debt settlement companies aren’t cheap, either. These companies typically charge a percentage of the amount they save you when they negotiate a debt. In the end, you could end up paying thousands of dollars for debt settlement services.
Credit counseling companies
A credit counseling agency may be able to help you handle your credit card negotiations by providing you with a debt management plan (DMP). A DMP may help you consolidate your debts and lower your interest rates.
If you meet with a credit counselor and determine that a DMP is a good fit for your situation, the credit counselor will help you contact your creditors to try to negotiate a more affordable payment arrangement. If the credit counselor is successful, you begin making a single monthly payment to the credit counseling company, which, in turn, distributes smaller payments to the creditors included in your DMP. In general, a DMP may help you manage and pay off your outstanding debts in five years or less.