How to negotiate credit card debt settlement by yourself

If you find yourself crippled by credit card debt, having racked up charges that will be hard to pay off, you might be able to settle your accounts with your lenders for less than what you owe. And you might not need a debt settlement company to do it. Here’s how to negotiate credit card debt by yourself.

Settling debt means coming to an agreement with your creditors to pay back part of what you owe while being forgiven for the rest. If you’re considering settling your credit card debt, you’ve probably already missed some payments, perhaps even several months’ worth. You may have already been referred to a collection agency. All of this puts a big dent in your credit score.  

Related article: How to settle credit card debt before going to court

Settling credit card debt pays off for both parties

Why would a credit card company let you off the hook for less than what you owe? It simply comes down to whether they want some of their money back versus none of it. Credit card debt is unsecured debt, meaning it’s not tied to an asset like a house or a car. So if a person’s financial situation gets so dire that they file for bankruptcy, it’s possible a credit card company won’t see any of the debt repaid.

Some people work with debt settlement companies to help them negotiate a settlement with credit card companies, but it’s also something you can do on your own. Debt settlement is not without its risks, however. Your credit could take a further hit and it could take years for it to recover, but it’s a definite option for debt relief. Here’s what you need to know:

Call your creditors: Know the timeline and the goal

Before you pick up the phone and contact your credit card companies, make sure you fully understand your debt situation. Find out who you owe, how much you owe, and the interest rates you’re paying.

Also find out when you last made a payment on the account or accounts. It’s often ideal if you can settle your debt before it becomes 180 days delinquent, when many creditors write it off as a loss. If you cannot settle your account before charge off, you will still owe the debt if it is written off, but it will be reported as a charge-off on your credit report, which hurts your score even more. That’s also a point when a creditor might sell your debt to a collection agency.

Related article: What does it mean to have my unpaid debt charged off?

Make a list of all your debt, not just from credit cards. That will help you give your creditors a fuller picture of your financial situation. It can sometimes be helpful to refer to the fact that you have other creditors to contend with if they are unwilling to work with you.

You should also know how much you can afford to pay to settle your debt, whether as a lump sum settlement payment or in installments.

The goal is to negotiate a settlement that is acceptable to your credit card company and hopefully a big reduction on what you owe. You also want to work out a payment plan that you can stick to because you don’t want to end up missing more payments.

“It can sometimes be a challenge to know who to settle with first, second, third when you have many credit cards and loans to contend with,” Michael Bovee, co-founder of Resolve, said. “Some creditors are more aggressive than others, and it can be important to target some settlements earlier than others. There are also instances where payment terms on your settlement will not be an option, which means all of your available cash flow could go to one account earlier than others. “

Once you have a good idea of your financial situation and what you can afford to pay, you can consider some of the available options for settling with your creditors. Not all the options are true settlements, but they can still give you some relief.

Enroll in a hardship plan  

If you’ve already missed payments on a bank credit card, that bank may have already reached out to you about reducing your monthly payments by enrolling you in a hardship plan. While not widely advertised, these programs lower your interest rate. They may also waive or eliminate fees and penalties. Also called “assistance programs,” hardship plans can be short-term (three months is typical) or long term. On a long-term hardship payment plan (up to five years), your account is canceled and your interest rate is frozen while you repay your debt.

What qualifies for a hardship plan? While hardship plans are generally negotiated on a case by case basis, usually a major life event that impacts your ability to pay will qualify you. Examples include unemployment, a serious illness, divorce or a natural disaster such as a fire, hurricane or flood.

Note that not all credit card issuers offer hardship plans. And even if they do, not all will provide specific information about their plans without talking to them directly. Discover seems to be the exception, offering information about its hardship programs on its website. If you want to see what kind of help you can get from your bank, call the number on the back of your card and ask a representative if they offer hardship plans. If they do, explain your situation honestly and tell them you want to pay what you owe but that you’re struggling right now.

Before you call, do your homework. Think about your current financial situation — your income versus your expenses and bills — so that you know what you can actually afford when it comes time to negotiate.

Negotiate a workout agreement

You may be eligible for a workout agreement with a bank credit card. This is when the bank eliminates or simply lowers your interest rate and reduces your monthly payment. In conjunction with this, you may ask the bank to forgive late fees or other penalties as well as reduce your balance. Under this plan, your credit line won’t be canceled as it will with a hardship plan, but it may be cut off, so you won’t be able to continue to use that card. This loss of available credit may impact your credit score because it will raise your credit utilization ratio (more about the factors that make up your credit score here). 

Offer a lump sum settlement

If you have access to a good amount of cash, or can put it together fairly quickly, you can try to negotiate a settlement with the credit card company in three payments or less (creditors are precluded from offering better than three-month terms if your account has not yet been charged off). Sometimes your credit card issuer will reduce your debt to the principal you owe. For example, let’s say you have a credit limit of $9,000, but with interest, fees and penalties, your current balance is $12,000. You may be able to negotiate so that you pay just three installments of $3,000. The other $3,000 you owe will be forgiven. (Note that this may affect what you owe the IRS; forgiven debt of $600 or more is considered taxable income unless you qualify for an exemption.)

Enroll in a debt settlement plan

This isn’t the easiest process and it will hurt your credit scores, but it could be an alternative to bankruptcy if your situation warrants it.  A debt settlement plan over a longer period of time will require you to negotiate an agreement with your creditors to pay back some of what you owe, either in installments or a lump sum. In general, a reasonable expectation is settling your debt for 50% less of what you owe if your account is five or more months late. For some, this could mean it could take a couple of years to settle all your debts.

Keep in mind that some credit card issuers are a little more flexible than others, says Bovee. He explains that in his experience helping people settle their credit card debt, Bank of America and Chase tend to be the easiest to work with. Citi, on the other hand, will probably want a larger settlement than some of the other companies. Discover and AmericanExpress tend to be fairly litigious, meaning they might sue you and take you to court, so it’s something to consider if you’re deciding which bills to pay off or settle first.

Related Article: How long does debt settlement stay on your credit report?

Call customer service to negotiate credit card debt

If your creditor hasn’t already reached out to you, you should reach out to them. Asking for someone in the collections and recovery department may be the most effective route to getting the right person on the phone. You want to talk to someone with enough authority to cut a deal with you when it comes to your credit card. And remember, you typically want to be at least 90 days late, and often moreso, before talking to a creditor about your options to settle your account for less.

Once you get that person on the phone, and have laid out your situation, stick to your guns and don’t be afraid to counter their initial offer. You have already figured out what you can pay and you shouldn’t overextend yourself financially. You might also want to talk to an attorney to help you with the settlement details.

After you’ve worked out a settlement with your credit card company, it’s crucial to get a written copy of your agreement so you have proof of your payment terms.