If you’re one of the millions of credit card holders who has found themselves buried in credit card debt with a balance you can’t hope to pay down, then you may be wondering if you can Negotiate Your Credit Card settlement yourself. Well, it is possible to do, but it’s not easy.
The first thing you need to consider is what kind of arrangement you are going to seek. Let’s be honest, you’d like your credit card company to forgive all your debt and pretend it never happened, but short of bankruptcy, that isn’t likely to happen.
Once you’ve accepted the reality that you will need to pay something, you need to determine what that something will be. Here are 3 possible debt payment solutions to offer to your credit card company when you make the call.
I. Lump-sum settlement.
This is by far the easiest to understand and to sell to your credit card company, but it’s often the hardest to carry out, because you need a large sum of money available.
Since most credit card issuers aren’t going to negotiate until you are behind, one strategy is to stop making payments to the credit card company and put that money (and as much extra as you can afford) into a savings account for a few months.
This is what many debt settlement companies do for you, or at least it’s what they say they will do for you. In many cases, they hold the money and let the credit card company come after you for the full debt owed anyway. It’s a big reason why debt settlement is not a good idea in many cases.
If you have access to a chunk of money, they you can make an offer to your credit card issuer for a 1 time payment that is less than the full amount you owe.
WARNING: This technique will likely hurt your credit score, but then again so will having a high debt balance and not paying it off…
II. Workout arrangement.
This is a much easier option to carry out than the lump sum. The Workout arrangement is when the bank agrees to freeze your interest payments and late fees while you payback your balance. This is also the most ethical solution in my opinion, because you’re telling the credit card company that you will meet your obligations and pay back what you owe, as long as they agree to stop pushing you back under while you do it.
WARNING: You will most likely no longer be able to use your credit card, since the bank will probably lower your limit. This is a good thing in the long term though, since it will keep you from racking up even more debt. However, the lower credit limit will increase your debt-to-income ratio, and lower your credit score.
III. A Forbearance Program.
This one is probably the easiest solution to sell to the credit card company, but not the best for your bottom line. A forbearance program is an agreement by the bank to pause your payments and interest fees while you get your finances back on track. This is like taking a timeout to gather your resources for the next play.
The next play though is usually getting back on a payment plan in which you agree to pay the full amount owed and any interest and late fees accrued – forbearance is not forgiveness.
Final thoughts.
Whichever solution you choose, keep in mind that these are tough times for everyone – credit card companies included. They can’t get blood from a stone and they know that. Credit card holders still have a lot of leverage and everything is negotiable. Job loss and negative home equity have put the squeeze on banks trying to collect full payment.
You can use one of the debt solutions from above as a starting point, then see what else you get bargain down in the process. For example, you might get the bank to forgive all late fees and interest fees and give you a forbearance if you agree to pay the full principal. It all depends on your situation, and is up to the individual creditor.
Regardless of which solution to choose, be sure to get your credit card issuer’s agreement in writing before you send them any money.
This is a common question, as well as a common misconception. The short answer is “no”, paying off old debt does not hurt your credit score. It also doesn’t improve your credit score that much either. Here’s why..
Once a debt hits the 180 days past due mark, it is recorded on your credit history and carries forward as a negative mark for 7 years. Nothing you can do will remove this prior to that 7 year expiration, so in effect the damage has already been done. Paying off that debt is the responsible thing to do, but you won’t be rewarded with a higher score for doing so. It does look better to lenders that you paid it off however, no matter how long it took.
So for debts 180 days past due, it’s better to pay them than not but don’t expect a big bump in your score for doing so.
The underlying reason for this is that creditors weigh your ability to remain current with your bills more than your ability to pay them back eventually. The better way to improve your credit score is to remain current on your debt and pay your bills on time. If you’re just focusing on paying off debt and some of it is past 180 late, then start at the most recent or current debt and work your way back, paying off the 180+ days late debt last.
Here’s an accompanying video clip in which Farnoosh Torabi, Jean Chatzky and David Bach field this question and more. (feed readers may need to view the complete post to see the embedded video)
A big topic in the personal finance blogging world is often credit cards vs. debit cards. Another, somewhat related topic is how many credit cards should a person have? This is not a one-answer-fits-all sort of question, but I feel pretty certain that most people would agree that 25 credit cards is a bit much.
Meet Pete D’Arruda, not only does he have 25 credit cards with a total available credit limit of $300,000, but he’s proud of it!
The crazy thing is he’s a personal finance consultant!
Why would anyone, much less a finance consult, think so many credit cards is a good thing? Well, it’s about the almighty credit score. See, one of the major factors in determining your credit score is what’s known as your debt-to-available-credit ratio (or “utilization rate“). This is simply a ratio of how much you currently owe to your total available credit. In D’Arruda’s case, his total available is a mighty $300,000.
So you would expect his debt to available credit ratio to be quite low, and his score to be quite high since he never carries a balance from one month to the next. In fact, he does boast of a 810-815 FICO score.
He also claims to have piles and piles of rewards in the form of cash back, airline miles, freebies and more.
But here’s the problem: You can get a very good credit score and low utilization rate with far less than 25 credit cards. This is just extreme.
Most finance experts recommend keeping your debt to available credit ratio below 30%. This means that D’Arruda has to keep the total of his current balance to under $90,000 to get the maximum benefit to his credit score. $90,000! Most people with $90,000 in credit card balances is likely to have bigger problems than a less than perfect credit score. This is just overkill.
You can achieve the same benefit by having one or two credit cards, and charging less that 30% on them. If that’s less than you spend per month, then use cash for the difference. (Here are 5 more ways to improve your credit score)
Besides having far too much available credit, he’s also opening himself up to 25 different potential points of identity theft.
And I for one wouldn’t want to have to keep track of all those accounts, various balances and rewards programs! And all for a high credit score which may not be all that important anyway.
I will give him credit for having self control. How many people in his situation would simply find themselves six figures in debt?
Since the CARD Act eliminates many of the fees and interest payments banks traditionally use to offset other expenses and because the CARD Act only regulates consumer credit cards, banks are paying for other services like free checking and general business costs on the backs of business card holders.
That may not sound like a big deal to many, especially with the “business is the bad-guy” mentally that seems so prevalent over the past few years, but it’s not companies like GE we’re talking about – it’s largely small, independent businesses.
Many of these are people who have lost their full time jobs as employees and decided to make a go of it on their own.
The biggest concern for most business card holders is a hike in interest rates on existing balances. This could mean thousands in extra payments a year for anyone carrying a large balance. That’s significant for many home-based or startup businesses.
To make matters worse, some unscrupulous credit card issuers have begun marketing business cards to individual consumers:
“A study released Wednesday by the Pew Charitable Trust’s Safe Credit Card Project says that consumers are still vulnerable to these practices, because more than 10 million offers for business cards are sent to U.S. households each month.”
Consumers may not even be aware that the CARD Act doesn’t pertain to business cards. It looks like credit card rates and fees that were once difficult to maneuver have just become more so. Be careful out there people.
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