How to negotiate debt with credit card companies

Credit card debt can pile up faster than most people realize — and once it starts piling up, it becomes all the more difficult to pay down. The average credit card balance in the U.S. rose to $6,501 in 2023, according to Experian. That’s 10 percent more than last year’s average balance of $5,910.

If you’ve been relying on credit cards to stretch your finances, only to watch your credit card debt grow and grow, you may feel like you’re never going to pay it all down. Like many others in your situation, you may have more options than you realize. One possibility is that you can negotiate your debt with credit card companies. This can help you get back on track and avoid more damage to your credit score.

Why credit card companies negotiate debt

When finances get tight, credit card payments are often one of the first bills people let slide. After all, most credit card debt is unsecured. If you don’t pay your auto loan or your mortgage, your car or house could be at risk. The same isn’t usually true with credit cards.

That’s not to say that falling behind on credit card payments isn’t dangerous. When you pay any bill late, credit card bills included, you could damage your credit. Credit problems can haunt you, often taking several years to fall off of your credit report. Plus, if you default on a credit card bill, there’s a chance that you could even be sued by a debt collector, and that leaves you vulnerable to more potential problems.

Credit card issuers are aware that your unsecured credit card debt may be at the bottom of your priority list if you’re in a financial bind. Rather than risk you ignoring the debt or filing for bankruptcy, a card issuer may be willing to consider negotiating your credit card debt so that it gets back some of its money rather than nothing.

Credit card issuers also have an incentive to retain you as a customer — so they may be willing to negotiate in order to maintain a lifelong relationship or keep you from missing payments.

How does credit card settlement work?

Credit card settlement is a type of debt settlement that will let you pay off credit cards for less than what you originally owed. This can be done by yourself but is sometimes done through a third-party agency, typically called a debt settlement company.

Using a debt settlement company

These companies can call up creditors and negotiate on your behalf to get your bills lowered. They will then typically put you on a payment plan to pay off any remaining debt you have. You will be responsible for sending payments to the agency, which then pays your creditors. But not all agencies are trustworthy or upfront about their fees. If you’re not careful, you could find yourself out of debt with your issuer but into debt with a debt settlement company.

Settling your debts on your own

If you don’t want to use a third-party agency, you can also negotiate with your issuer directly. Many credit card issuers offer hardship programs, and some might agree to lower your interest rates for a set period of time while you pay down your debt.

The benefits of credit card settlement are clear: You may be able to get out of debt more quickly without the responsibility of the full debt load. However, your credit score will likely drop as a result of debt settlement, and you may have tax consequences down the line. If you settle a $15,000 debt for $10,000, for instance, you may be taxed on that $5,000 difference. If you are, you’ll receive a 1099-C cancellation of debt form.

Types of credit card debt settlements

Card issuers are likely to agree to one of three types of settlements. The best one for you depends on your current financial situation.

Lump-sum settlement

With this negotiation technique, you offer to settle your outstanding debt in one big payment, albeit for less than your balance. For example, you might owe $4,000 between charges, interest and fees on your credit card, but you ask the bank to accept $2,500 to settle the account in full. If the card issuer accepts, it will forgive the remaining balance.

Lump-sum settlements have two potential downsides. First, a notation may be added to your credit report showing that the account was “settled for less than the full balance.” This could be bad for your credit score. However, if your account was already past due, the notation may not cause additional damage. You also might have to claim the forgiven debt as income on your upcoming tax return and potentially pay taxes on that amount, so if you go this route, it’s a good idea to start saving toward those tax payments.

Workout agreement

A workout agreement typically involves your credit card issuer lowering your interest rate or temporarily waiving interest altogether. The bank may also be willing to take other steps to make it easier for you to keep up with your debt, including reducing your minimum payment and potentially waiving past late fees on your account.

On the other hand, your card issuer may close your account as part of the arrangement. Although your credit score is likely already damaged from late payments, closing your account (and thus wiping out your available credit limit) could raise your credit utilization rate. Credit utilization is responsible for up to 30 percent of your FICO Score, so if your credit utilization increases, your credit score may drop further.

Hardship agreement

Sometimes called a forbearance program, a hardship agreement may be an option if your financial setback is temporary. If you were to suddenly lose your job or have an unexpected illness or injury, you should call your card issuer right away to see if it offers a hardship program.

With a hardship plan, your card issuer may agree to lower your interest rate, suspend late fees or reduce your minimum payment on a temporary basis. You might even be able to skip a few payments while you work to rebound from the financial setback.

Unfortunately, your credit history and scores could still be at risk with this type of agreement. Depending on the terms of the bank’s hardship agreement, it may report negative information to the credit bureaus during the forbearance period.

How to determine if you should negotiate your debt

If you have credit card debt that you are looking to settle with the credit card company, consider a few factors first. First, explore other options like credit counseling or bankruptcy. Either of those may be a better fit for your specific situation.

Second, consider whether the credit card issuer will even be willing to negotiate with you. Many issuers won’t negotiate with cardholders unless they’re several months behind on their payments already. The credit card company will also want to make sure that you have the financial ability to pay any settlement. This could be a lump sum or enough monthly cash flow to fulfill your settlement obligations.

How to negotiate credit card debt

Negotiating with credit card companies can be tricky because many will likely be reluctant to change their terms unless they are worried about you filing for bankruptcy. Whether you choose to negotiate credit card debt on your own or hire a professional to represent you, it’s best to come prepared to negotiate. Start with the following steps:

1. Confirm how much you owe. Before credit card negotiation begins, check your account balance online or call your card issuer to discover your current balance. It’s also wise to confirm the current interest rate on your account, especially since you may be getting charged the issuer’s penalty APR as opposed to their regular APR.
2. Review your options. Decide if a lump-sum settlement, workout agreement or hardship agreement makes the most sense for your circumstances.
3. Call your credit card issuer. If you’ve decided to handle negotiations on your own, call your credit card company and ask to speak with the debt settlement, loss mitigation or hardship department; a general customer service representative won’t have the authority to approve your request. Once you’re connected with someone who has the ability to negotiate with you, explain your situation and make your offer. Be polite but firm.
4. Outline your terms. If you’re considering filing bankruptcy or hiring a professional to help you with your debt, let the card issuer know and mention that you’d rather work things out directly. At this point, be prepared for the card issuer to potentially freeze your credit limit or close your account.
5. Take detailed notes and follow up if needed. If you like, you can opt to record the call, although some states require you to let the card issuer know that you’re recording the call and vice versa. Don’t be afraid to ask for a supervisor or call back multiple times over the coming days and weeks if you’re unhappy with the terms being offered.
6. Get the agreement in writing. If the card issuer agrees to a settlement or arrangement that you’re happy with, ask for documentation. You don’t have a deal until you have it in writing.

Getting help with credit card debt

When you’re overwhelmed with credit card debt, it might help to have a professional work on your behalf. In general, there are two types of companies that may be able to negotiate with credit card companies for you: debt settlement companies and credit counselors.

Debt settlement companies

Debt settlement companies are for-profit businesses that will try to negotiate lump-sum settlements with your creditors. Typically, you stop making payments to your creditors and start sending funds to your debt settlement company each month to build your account.

Once your account with the company grows large enough, the company will call your card issuer and make an offer to settle the debt for less than you owe. If the bank accepts the offer, the debt settlement company sends the funds to your creditor and takes a cut for its services.

Cost of debt settlement companies

Debt settlement companies can potentially save you time and money, but there are potential issues with this approach. First, if you stop paying your credit card company, it will report late payments to the credit bureaus. The account may eventually be charged off, sold to a collection agency or worse. All of these actions can have serious consequences where your credit is concerned. There’s also no guarantee that your bank will be willing to negotiate, so you could end up with ruined credit and even more debt.

Debt settlement companies aren’t cheap, either. These companies typically charge a percentage of the amount they save you when they negotiate a debt. In the end, you could end up paying thousands of dollars for debt settlement services.

Credit counseling companies

A credit counseling agency may be able to help you handle your credit card negotiations by providing you with a debt management plan (DMP). A DMP may help you consolidate your debts and lower your interest rates.

If you meet with a credit counselor and determine that a DMP is a good fit for your situation, the credit counselor will help you contact your creditors to try to negotiate a more affordable payment arrangement. If the credit counselor is successful, you begin making a single monthly payment to the credit counseling company, which, in turn, distributes smaller payments to the creditors included in your DMP. In general, a DMP may help you manage and pay off your outstanding debts in five years or less.

Cost of credit counseling agencies

Although credit counseling companies are often nonprofit organizations, their services aren’t free. Many credit counseling companies charge startup fees and monthly fees (often $25 to $35) when you enroll in a DMP, although they take your financial situation into consideration before charging.

How does credit card debt settlement affect your credit score?

If you work with a debt settlement company, the company might advise you to stop making payments on your debt during the negotiation process. This may cause your debt to fall into delinquency, which your creditors will then report to the credit bureaus. Delinquencies stay on your credit report for seven years, meaning you could feel negative impacts even after you settle the debt.

Debt settlement may also affect your credit score if it affects your credit utilization. If you stop making payments on your debt, your balance may climb due to additional charges and late fees. Using too much of your available credit and not paying off debt will cause your score to drop while you’re in the process of settling that debt.

Alternatives to credit card debt settlement

Debt settlement is the right choice for some people, but keep in mind that it will lower your credit score and make it harder to borrow money in the future. Even if you do qualify for future credit, your interest rates will be much higher than they would be if you had an excellent credit score. If you’d like to avoid debt settlement, consider these other debt relief options:

Credit card balance transfer

If you have a lot of credit card debt, consider opening a balance transfer credit card with an introductory annual percentage rate (APR) offer. These cards are designed for cardholders who want to move debt from a high-interest credit card to a new balance transfer card, typically with a 0 percent introductory APR promotion.

These promotions typically last for between 12 and 21 months, meaning that during that time, you’ll pay 0 interest on your debt so long as you make at least the minimum payment on the card and abide by the issuer’s rules. You can then come up with a debt payoff plan and have all of your payments go toward your principal instead of toward interest.

Debt consolidation loan

If you have many different kinds of debt or a lot of credit card debt, a debt consolidation loan might help. This lets you take out a lump-sum amount, pay off all of your outstanding debt and then make one monthly payment to your new loan.

Debt consolidation loans tend to have lower interest rates than credit cards, helping you pay off your credit card debt without racking up even more interest charges. That said, the interest rate you’re charged depends on your credit score. Before applying for a debt consolidation, shop around with a few lenders to see which offers you the best deal and the best terms.

The bottom line

Credit card negotiation may feel overwhelming, but trying to avoid the problem will only make it worse. The truth is that you have many options for reducing your debt. Whether you choose to negotiate credit card payoff yourself or work with a professional, it’s important to carefully weigh your choices and come prepared when it’s time to call your credit card company. And even if you decide to handle the negotiations yourself, you can still reach out to a certified credit counselor for advice.

Don’t forget to consider alternative options, too, such as getting a card with a strong 0 percent intro APR offer or looking at debt consolidation loans.