Credit cards are awesome. Until they aren’t. With over 80% of Americans in debt, it’s clear that some people have problems managing their credit.
Make no mistake — despite financial literacy programs and credit recommendations, credit card companies do not want you to pay your balance in full each month. They would much prefer you crawl by with minimums, paying exorbitant interest fees until the day you die.
But it doesn’t have to be that way. There is a third option that people rarely take, either because they don’t know how or they don’t believe they have the power: negotiating with credit card companies. This option can save you tens if not hundreds of thousands of dollars on credit payments, and takes (combined) perhaps a few hours to do.
Be warned that negotiating with credit card companies can impact your credit score. Not all methods I outline below will influence it significantly, but a few (debt settlement and debt management programs in particular) can reduce your score by several hundred points. You should weigh the pros and cons of this carefully, and decide whether your reduced debt is worth the decreased score. Remember that credit scores take several years to build back up in full, and this will have a significant impact on your ability to borrow during the process.
So what are these methods? How do you negotiate with credit card companies? I’ve compiled a list of six simple steps you can get started with below. Note that some of these methods have different names based on where you are in the world and what company you owe, so make sure to do your research before calling.
Whether your debt is with debt collection agencies or credit card companies, many have quotas they need to fulfill on a monthly basis. You can take advantage of this by calling several days before the end of the month — most agents and companies will be significantly more flexible when their quota is on the line.
This doesn’t work for all companies, but if even fifty percent of them still operate on quota systems, that’s a 50% chance of significantly better rates. Take everything you can.
I’ll tell you this right now: you won’t get the right person on your first phone call. You’ll likely be re-explaining yourself five to ten times to a suite of different people, and they’ll pass you up the ladder as you call. In addition, you probably won’t complete negotiations on the first day. Instead, be ready for a week or more of negotiations before you get your lusted-after lower rate or better terms.
That being said, it can be done. You only need to keep at it. Think of it this way: if all of this work results in shaving off ten thousand dollars of debt, how many hours of work would that have normally taken you at your job? One hundred? One thousand? That’s a little more than the ten or twenty hours you’ll spend negotiating with your credit card company.
Credit card companies operate on statistical probabilities. There is a certain chance that, given a certain amount of time, you will pay off your debt in full. But there is also a chance that you’ll go bankrupt and quit paying it entirely. This represents a liability for the credit card company that they want to minimize.
Because of this, many companies would rather have you pay off your debt in full now, even if it’s a lower total, than deal with the chances of you going into bankruptcy and being unable to pay anything. In financial terms, this is called a Lump Sum Settlement, and is one of the most common ways people negotiate lower rates.
To do so, call your credit card company and let them know that you’re having a very difficult time making payments. You can go as far as to tell them you’re drowning in debt (so long as it’s true). Mention you don’t believe you’ll be able to make the full payment over the course of the rest of your plan, and offer a 30%-40% discount if you pay right now instead.
You probably won’t get 30%-40% off. Credit card companies are excellent at negotiating with people in your position, after all, and are known for squeezing them for all they’re worth. However, don’t be surprised if you shave off a fifth or even a quarter of your total bill because you anchored your price well — and this could mean tens of thousands of dollars off of a sizable debt.
This method works best when your inability to pay is only temporary, usually due to unemployment, a medical problem, or a family emergency. With forbearance, credit card companies provide you a break on fees and interest, and can even halt payments for several months while you get back on your feet financially.
Unfortunately, this method still means you pay every penny of your debt. You just get to take a break for a few months while you figure things out. But while this may not reduce the total amount of debt owed, it can certainly provide you with enough flexibility to quickly improve your financial situation. You can then use that extra paying power to knock down your debt fast.
A workout program involves negotiating different payment terms with your lender. For example, whereas your previous interest rates might have been 22.9%, you may be able to workout a payment program at 18.4%. That extra 4.5% could save you thousands of dollars per year on your total. If you have any prior punitive fees — extra debt associated with your past inability to pay — you can often get that wiped off as well.
Unfortunately, workout programs often come bundled with a substantial hit to your credit score. This is because your company will often limit or completely remove your access to your credit card, which is seen by bureaus as negative. It makes sense: if you’re in big enough debt that you’re negotiating terms, odds are you probably shouldn’t rack up any more. But the effect of having an account shut down can still take you a year or more to remove from your score, so choose this option carefully.
In simple terms, debt settlement is often your last stop before bankruptcy. For that reason, credit card companies are usually willing to do whatever it takes to ensure they get as much money as possible out of what they’re owed. And this usually involves heavy rate cuts of 30%-50% or more.
Only bring this up if your debt is truly unmanageable. Debt settlement, whether handled by you or by a debt management company acting on your behalf, severely impacts your credit score. It takes years to gain back the ability to borrow confidently, and many credit card companies won’t go back to approving you until a full seven years has passed.
That being said, such an arrangement can help you massively. People going into debt settlement programs routinely wipe tens to hundreds of thousands of dollars off their total in a matter of a few hours. My own family used a debt settlement program a few years after immigrating to Canada, and it was the only thing that kept us off of the streets. But it certainly did impact our credit and our ability to borrow. For that reason, I highly recommend consulting a financial professional to discuss potential consequences and what it means for you and your family.
Negotiating with credit card companies can be intimidating, especially when you’re buried under a mountain of bills. The agents on the other line can also be terse, inflexible, and difficult to deal with. Unfortunately, many people let this fear and inconvenience stop them from reducing their payments substantially or receiving a break on fees.
However, if you’re faced with the prospect of a life of misery on the one hand, or a few difficult conversations on the other, always choose the former. Even if you go into debt settlement, a few years of poor credit means nothing if you get to live those years healthier and happier. Your family and friends will thank you for it — not just because of the reduced financial strain, but because of the beneficial impact on your stress levels.
Whatever you choose, know that it can be done. If you want to successfully negotiate with your credit card company, you only need to pick up the phone and start now. Get moving!