How to negotiate debt with credit card companies

It’s the end of the month and time to pay bills. You glance at your credit card statement and, once again, you’re only able to make the minimum payment.

It’s a plight shared by many U.S. consumers. As of the last quarter of 2021, the average credit card balance in the U.S. was $5,589, according to Experian.

If you have credit card debt that you’re struggling to pay off, it may be worth negotiating your outstanding debt with your lenders. You can negotiate with your credit card issuers to reduce your monthly payments, lower your interest rate, reduce fees and more to make it easier to pay off your credit card balances.

Here’s a guide to negotiating your current credit card debt, as well as ways to stay out of the cycle.

Why negotiate credit card debt?

If you find yourself in over your head with credit card debt, it’s a good idea to see what your issuer can do to ease your load. The ultimate goal of negotiating credit card debt “almost always is to reduce monthly expenses,” said Michael Sullivan, director of education at Take Charge America. Negotiating credit card debt, added Sullivan, “should be only done when necessary.”

You may believe credit card companies are unwilling to negotiate with you. This is untrue. Turning to your issuer could result in a mutually beneficial solution.

“One of the first things to remember is that credit card debt is unsecured debt, so it isn’t like a car loan where the lender can recoup money when the debtor is in default by repossessing the car,” said Steve Weisman, lawyer, college professor and financial expert. “Therefore, a credit card company may be more willing to work with someone having financial difficulties, particularly if they are not as a result of excessive spending, but due to other circumstances affecting the credit card holder’s income.”

Recognizing when you should consider negotiating your credit card debt is important. According to Laura Sterling, vice president of marketing at Georgia’s Own Credit Union, “If you are unable to make your monthly credit card payments, either because your debt is too high or you’ve experienced a hardship, it may be time to consider negotiating your credit card debt.”

Types of credit card debt settlements

There are varied approaches to settling your credit card debt for less than you actually owe. If you decide to negotiate your credit card debt, consider the following suggestions from Sterling and Paul Sundin, CPA and tax strategist:

Lump-sum settlement

Rather than extend your debt across years and pay in installments, this type of negotiation offers to pay the entire debt at once but at a lower total amount. This is ideal for people who want to get out of debt as soon as possible.

A lump-sum settlement is usually done through a third-party agency, for whose services you may have to pay extra fees. When negotiating a lower lump sum, be sure that it’s a reasonable amount for you.

Forbearance

If you are facing an unexpected hardship, such as a job loss or major illness, many card companies have hardship programs that allow temporary payment forgiveness or other modifications to help you get back on your feet. With this plan, a card issuer may also agree to lower your interest rate, temporarily reduce your minimum payment or waive late fees.

Unfortunately, your credit score may still be affected, since you still owe the principal debt. That may continue to take time to pay off and accrue interest.

Workout arrangement

If you contact your credit card company and ask for a better deal, the issuer may offer what is known as a workout arrangement. A workout arrangement is an agreed upon plan to renegotiate the terms of your credit card agreement. With a workout arrangement, the credit card company may agree to lower your minimum monthly payment, waive the interest for a few months or lower your interest rate.

This plan is good for cardholders who have room in their monthly budget to pay off debt but would greatly benefit from a lower monthly payment.

Debt management program (DMP)

In a DMP, you work with a credit counseling company, which is typically a nonprofit.

“A credit counselor will contact your creditors and negotiate a less expensive payment plan on your behalf. If negotiations are successful, you begin making monthly payments to the credit counseling company, and they make payments to your creditors,” Sterling said.

Although credit counseling companies are often nonprofit, they are not necessarily free. Credit counseling companies often charge monthly fees. Keep in mind, your credit report may also indicate that you are in a DMP, though it won’t lower your credit score.

Debt settlement firm

For-profit debt settlement companies work to negotiate lump-sum settlements with creditors, though this is not the best choice.

“Debt settlement companies ask you to stop making payments to your card issuer and instead require you to make monthly payments to your debt settlement company to build your account,” Sterling said. “Once your account grows large enough, the debt settlement company will contact your card issuer and make an offer to settle for less than you owe. If the issuer accepts the offer, the debt settlement company pays your creditor and keeps a percentage of the money you’ve paid them.”

Debt settlement is often a last resort for debt, and if you go through with this option it will lower your credit score. While you’re busy paying the debt settlement company, your credit card issuer may continue to charge you interest and fees.

You should especially watch out for less reputable debt settlement companies that make tall promises.

How to negotiate credit card debt

Negotiating your debt is a manageable process. Sterling recommends the following approach:

1. Find out how much you owe. Before starting negotiations, check a recent statement or contact your issuer to determine your balance due and interest rate.
2. Make a plan. Decide if a lump-sum settlement, workout arrangement or forbearance makes the most sense for your circumstances. Do you want to handle the negotiations yourself or rely on a professional? Review your current financial situation and risks involved.
3. Contact your credit card issuer. If you’ve decided to handle negotiations on your own, call your creditor and ask to speak with the debt settlement department. Explain your situation and make an offer. Prepare a script beforehand so you know exactly how to make your request. Be honest, clear and polite. If the representative is unable or unwilling to negotiate, be prepared to ask to speak with a supervisor or to call back later.
4. Take detailed notes. Document the dates and times of your conversations and keep as a reference full names and titles of anyone you spoke with.
5. Get the terms in writing. If you successfully negotiate your debt, get everything in writing so that you can always refer back to your terms in case anything else arises. Be sure you understand and agree with the new terms.

What are the downsides to credit card negotiation?

Negotiating your credit card debt can be a great way to save money and catch up with your payments, but there are a few potential drawbacks to consider. The first is that your creditor has no obligation to agree to negotiate. So, if you stop payments to the issuer while you or a third-party agency or firm negotiates, and the negotiation falls through, you may find yourself in more debt than before.

Second, your credit score may suffer from credit card debt negotiation. Even if your debt was never officially late, and therefore not delinquent, your credit report will still show you settled your debt for less than the full balance.

However, for delinquent accounts, which have already dragged down your score for the usual reasons — missed payments and high credit utilization ratio — the settlement notation may not cause additional damage.

For those who opt for a lump-sum settlement, you may also have to claim the forgiven debt as income on your upcoming tax return and pay taxes on that amount. If those taxes eat into your overall savings, you should consider this before deciding whether it’s the right move.

Alternatives to debt negotiation

Debt settlement is not your only option for getting out from under your credit card debt. Let’s take a look at some other options for debt relief that may be available to you.

Balance transfers

If you have multiple sources of high-interest credit card debt, you can consider doing a balance transfer. By transferring debt to a balance transfer credit card with a lower interest rate, you can make paying down your debt more manageable and can pay it down faster, as more of your payments will go toward principal than interest.

Having all of your credit card debt on one card can make it much easier to manage your debt, as you’ll only have one monthly payment to make. This move only makes sense, though, if you can secure a lower interest rate than what you’re currently paying.

Debt consolidation

Similar to a balance transfer card, you can consolidate all of your debt by combining multiple sources of debt into one debt consolidation loan. This can make paying off your debt more convenient, and if you secure a lower interest rate you can spend less on debt payments. If you need help with this process, you can work with a credit counseling agency to come up with a debt consolidation plan.

Bankruptcy

While bankruptcy is typically viewed as a last resort, it may be the right path forward for you. When you file for chapter 7 bankruptcy, you can get rid of most forms of outstanding debt such as credit card debt. However, debts such as back taxes, student loan debt and missed child support payments are excluded from bankruptcy.

Similar to debt settlement, filing for bankruptcy hurts your credit score, but the bankruptcy process can go much faster, which allows you to move on and start to rebuild your finances sooner.

Bottom line

If you’re struggling with debt, contact your credit card issuer to start a conversation. Chances are they’ll be motivated to figure out a plan to help them recoup at least some of their losses.

If you want some help, consider professional credit counseling, but try to stay vigilant about which nonprofit organizations or for-profit agencies you ask to negotiate on your behalf.

And of course, be aware of the risks of negotiating your credit card debt. Though it’s great that you could potentially pay a lower sum than your actual debt or renegotiate the terms of your repayment, your credit score could suffer.