This weekend I had the opportunity to meet an old friend. When we talked about our personal lives and how we deal with it, The conversation turned to personal finance. As we reflected on how our lives have changed over the past year, we realized that we were both struggling to manage our credit card debt. When I realized I was in danger of falling into old habits, I decided it was time to take control and make a plan to negotiate my credit card debt.
Dealing with credit card debt…Again
About five years ago, I celebrated a major financial milestone when I paid off my credit cards and became completely debt free. However, when I returned home last summer, I found myself in a very familiar and undesirable position. With little cash and inflated travel prices, I paid for everything with my credit card. Although it was a relatively small amount compared to the mountain of debt I had already conquered (about 3.000 US dollars), it was discouraging to see my balance go up again.
I also worked fewer hours and earned less income. Unfortunately, this means I can't pay as much attention to the principle as I did while working in Taiwan. My credit card has kept me afloat during the pandemic as I struggle to make ends meet. However, I seem to be treading water just to pay off my debt due to the high interest rates. I continue to make regular payments and send more when possible. But there has been little progress in reducing my overall balance. After our chat, I knew it was time to think about negotiating my credit card debt so I wouldn't fall further behind.
Why credit card companies negotiate
After a little online research, many credible sources discussed how and why credit card companies often negotiate debt. Since credit card debt is unsecured, many companies prefer to settle to recover at least some of the amount owed. Based on personal testimonials from friends and online forums, they also offer a variety of ways to reduce your debt if you approach them with the intention of paying it off. They are in the business of collecting money, so they are often willing to compromise and work out a payment plan with you. So it looked like I had a good chance of finding a solution and getting back on the fast track to paying off my debt.
Make a plan for negotiating your credit card debt
The first step of all my financial plans is to sit down and review my records. So I combed through credit card statements and recorded the balances, interest rates, minimum payments and payment history of each one. Although I had already researched several common settlement options, I also called a debt counselor to make sure I had covered all available options. It was important for me to read the fine print and understand if there would be any long-term disadvantages as well.
Settlement options When negotiating credit card debt
After talking to the debt relief counselor, I narrowed down the possible solutions. Since I didn't qualify for their debt management programs, my best bet was to deal directly with the credit card companies. The following settlement options seemed most promising for my situation.
Payment agreement
The first option was to contact the debt settlement department to discuss a payment arrangement. Based on the experience of those I spoke with, credit card companies offer a wide range of agreements. Some waived or reduced minimum monthly payments, while others would forgive earlier late charges. However, the company often cuts off your credit line so you can no longer use the card. In addition, payment arrangements can affect your credit score because you have less credit available to you.
Under my circumstances, the best arrangement would be to charge lower interest rates. Not only would this allow me to pay more on the principal balance, but it would also allow me to pay off my credit card debt in less time without affecting my credit score.
Lump sum statements
Another promising option for negotiating my credit card debt was flat-rate billing. With this deal, you can negotiate to pay less than you owe. But you need to have a large amount of cash on hand to make a large payment up front.
Although this was a quick fix to eliminate debt, it could also negatively impact your credit score depending on how the company reports the statement. If the account is marked as "settled" or "charge-off", it counts against your credit score. There are also tax implications, as debt forgiveness totaling more than $600 is considered taxable income. In addition, settled accounts remain on credit reports for 7 years. So, lump sum settlements can limit your ability to take out future loans.
Balance Transfer
A credit card balance transfer seemed like another interesting way to help me get ahead of my credit card debt. With a balance transfer, move your entire balance from high interest credit cards to one with lower interest rates. Some even offer interest-free introductory periods of between six and 18 months.
Since my balance was relatively low, I am confident that I will be able to pay it off completely within a year. However, some cards charge balance transfer fees that actually cost you more than you end up saving. It also felt counterintuitive to take out another credit card as I struggle to keep control of the ones I already have.
Act as your own agent
Since I do not qualify for debt relief services or consolidation loans, I decided to act as my own agent and negotiate my credit card debt for myself. After careful consideration of my choices, it seemed advisable not to do anything that could hurt my credit score. I worked hard to improve it, so I did not want to report statements about my credit history. So I have contacted my credit card companies to discuss lower interest rates.
I prepared a script and rehearsed it several times before making the call. I nervously waited to be put in touch with the right department, ready to ask for a supervisor if needed. Once I reached the right person, the request was simple enough. I checked that my current interest rate was 16.9% and asked to lower it. After a few moments, the representative checked my account and told me that I qualified for a lower APR of 15.24%.
Although this wasn't a huge win, I still consider it a victory. Every small victory brings me one step closer to being debt free again. Having learned from previous experiences, I also asked for the change in writing and recorded all the details of the call.
This whole process taught me a few important things. First, you will never get help unless you ask. Secondly, the worst they could have told me was "no", so I had nothing to lose. Finally, it reminded me how easy it is to fall back into bad habits. However, there is an important difference from the first time I went down this road. This time I was able to identify the problem and fix it before it got out of hand. If I stay on track with my repayment plan, I should be debt-free again before the end of the year.
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