How to Negotiate Credit Card Debt
So, you are struggling to make ends meet and your credit card debt is mounting. The good news is that it is possible to negotiate credit card debt settlement with your bank or collection agency. That being said, the process is not an easy one and often drags on for many months. Patience and persistence is the key here and with the right tactics you might just be able to settle your debt without totally destroying your credit rating.
Important: this article will focus only on negotiation with collection agency, not the original creditor (ie. the credit card company). Simply call your credit card company to find out. If you are not dealing with the collection agency, refer to the article on negotiating credit card debt with the credit card company.
First, a few useful background information:
A collection agency is a company that collects debt on behalf of creditors. When your debt has reached a collection agency, that means your credit card company has given up on you and has transferred the debt by selling it to the debt collector. Now important note: they usually obtain the debt for roughly 5 cents on the dollar! It could range between 1 penny to 10 cents on the dollar depending on how recently the account has been charged off.
Only unsecured debts can be settled, such as credit cards, medical bills and student loans. Therefore, the tactics presented here to negotiate credit card debt may work for other unsecured debt as well. On the other hand, secured debts, such as mortgage and car loans, cannot be settled as the creditor can simply take the property away.
Now to the tips for negotiating credit card debt:
The most important thing to keep in mind is that you, not the debt collector, has the leverage. Why? Because you have the money he is after. Since the debt is unsecured, the collection agency receives nothing if you declare bankruptcy so it is in their best interest to get something rather than losing the entire amount. Thus, use the possibility of bankruptcy to your advantage by honestly presenting to your creditor that you have no other alternatives and that this would be the only way your creditor can receive anything. Also, remember the collection agencies only pay pennies on the dollar for your debt. Therefore, they are much more willing to settle for less compared to credit card companies because they will still be making a profit.
Do not be fazed when you see large amount of late fees or punitive interests on your balance. Their significance is largely to stuff more money to the pockets of the collection agency. Separate the legitimate debt owed from the illegitimate penalties and try to have these fees waived. And most companies will agree.
Always start your proposal at less than you realistically expect to achieve. Your should begin at no more than 25% as your first proposal and you could end up anywhere from 10-40% depending on individual companies. Regardless always aim high (or is it low?). Another way to gauge how much the collection agency would settle is by assessing the age of the debt. You can expect to settle for less the longer the debt has been owed.
The best way to correspond with the collection agency is through registered mail. This way you automatically have a written record of all the discussions. Similarly, everything that you and your creditor agrees on for the settlement would be in writing. It goes without saying that you should keep a copy of every letter, record and agreement during the credit card debt negotiation.
Never accept the first offer and take your time before settlement. Again, show evidences that you are in serious financial difficulties and demonstrate how you could not meet the debt obligation without X amount being removed. Never agree to a deal unless you reach a satisfactory settlement (again varies among different companies) and give multiple attempts at further reducing the settlement amount.
Finally, before a deal has been reached it is critical to negotiate your credit rating as well. It’s great to finally shed your debt obligation but you will also want to contain the damage to your credit. Note: a “paid” collection is just as bad as an “unpaid” collection and any listing from a collection account is a major black dot. Your best option is to have the collection listing completely removed. If that is not possible, try to negotiate the listing as “paid” only with no other negative annotations. A worse alternative is to list the account as “settled” only, again with no other negatives. Your absolute last resort would be “paid charge off”. This is as damaging to your credit score as bankruptcy and furthermore, a “charge off” on the principal is taxable if it is more than $600.
In summary, don’t get frustrated if you are met with rejections or that things don’t go your way. Patience and persistence is your best weapon. Trying to negotiate credit card debt yourself is not easy, but the ultimate consolation is well worth the effort.