4 Signs It's Time to Negotiate Your Credit Card Debt

The terms of your credit card debt aren’t set in stone. If you’re feeling overwhelmed by your outstanding balance, it is possible to get a break from your creditors.

By negotiating your debt, you could land a lower monthly minimum payment, reduce your interest rate or settle for less than what you owe, helping you regain control of your repayments and right troubled accounts.

“You can always negotiate with the lender,” says Rod Griffin, senior director of public education and advocacy for credit bureau Experian. “Every lender wants to get paid, and if you’ve experienced some financial challenges, most will work with you.”

As you consider the best ways to pay off credit card debt, keep in mind that getting your creditors to forgive part of your debt or alter your repayment terms does come with some downsides, like possible credit score damage and higher taxes.

The following four signs can help you determine if negotiation could be the right move for your debt and benefit your overall finances.

1. You’re struggling to make the minimum payments

As soon as you suspect you cannot make the minimum payment on one or all of your credit cards, it’s time to call the issuer, says credit expert Beverly Harzog, author of The Debt Escape Plan: How to Free Yourself From Credit Card Balances, Boost Your Credit Score, and Live Debt-Free.

“It is a mistake to wait until you’re already behind on payments to try and negotiate with your credit card company,” Harzog says. “If you call before your debt is delinquent or in default, issuers will be more inclined to work with you. They’ll see that you’re trying to be responsible and manage the situation.”

Credit card companies are unlikely to forgive or settle part of your debt for less than you owe if you call before missing a payment. But they will often offer a hardship plan with other concessions that could help you afford your bills, such as lowering your interest rate, reducing your minimum payment amount, or waiving fees.

“It is hard to get creditors to reduce the amount you owe,” Harzog says. “Whereas the majority of people I’ve spoken with who’ve called their creditor can get into some kind of hardship program.”

Credit card issuers and debt collectors tend to be more willing to settle your debt if you’re behind on payments, Griffin says. Creditors understand that if you’re financially strapped, you’re likely to prioritize paying for necessities, like groceries or rent, and any secured debts, like an auto loan or mortgage, above your unsecured credit card balances since you don’t risk losing an asset by skipping a payment. So rather than having you ignore the debt or file for bankruptcy, a card issuer or debt collector may settle as a way to recoup a portion of their money instead of potentially receiving nothing.

That said, holding out for debt forgiveness by stopping all repayments is a risky move that could backfire, Griffin warns. Creditors do not have to agree to settle your debt for less than you owe, and defaulting on your debt will damage your credit score, trigger costly fees and potentially lead to debt collectors or creditors suing you.

To negotiate with the card company, ask to speak with the issuer’s debt settlement, loss mitigation or hardship department. Explain your situation, the cause of your financial duress, any steps you’re making to address the problem, and the concessions you’d like, advises Harzog.

You always have the power to negotiate on your own, but if you want expert help, you do have options. You can work with a non-profit credit counseling organization, which can help you get a lower interest rate and set up a payment plan for a modest fee. You can also hire a credit card debt relief company to negotiate for you — these companies specialize in working with creditors to settle your debt for less than you owe. When they negotiate a settlement (and you approve it), you’ll pay a fee based on a portion of your debt.

2. You can pay something toward your debt

Your credit card issuer may settle part of your debt if you can make a large, one-time cash payment equal to a portion of your outstanding balance. For instance, if you owe $10,000, the credit card company could agree to consider the debt paid in full with an immediate payment of $8,000. Typically, creditors will accept a payment worth between 30% and 80% of the total debt owed when accepting a settlement agreement, but negotiations aren’t always successful. Your credit card companies do not have to settle and may be unwilling to do so, especially if you owe a large amount or offer to pay a smaller share.

If you cannot make a lump-sum payment to settle the debt, your credit card company may be open to other arrangements. Some lenders will reduce the principal on your account and then allow you to make installment payments to clear the remaining balance. This effectively lowers your debt level without requiring you to make one big upfront payment. For example, if you owe $10,000, your card issuer could agree to drop your balance to $7,000, but you’d still need to repay that outstanding amount and accruing interest.

An easier get than debt settlement is a workout agreement, where your card issuer typically lowers your interest rate or waives fees and other charges for a set period. They may also be willing to reduce your minimum payment or eliminate past late fees.

For those dealing with a temporary financial setback, like job loss or unexpected illness, entering a forbearance or hardship program might be a better option. In these cases, the credit card company will reduce or suspend your minimum payment, interest or other fees for a limited time —typically six months to a year — while you recover from your financial emergency.

Whatever settlement or other arrangement you’re after, be clear with the credit card company about what you’re able to pay and when. If you come to an agreement, ask for documentation. You want to have the deal in writing.

3. You can handle a higher tax bill

Any successful debt settlement you do negotiate could result in a larger tax bill come April. That’s because the IRS generally views the forgiven portion of your debt as taxable income, says Harzog.

Forgiven debts over $600 require a lender to send you an IRS tax form known as a 1099-C cancellation of debt form. This document will detail the total amount forgiven but not whether you’ll owe taxes. For that, you’ll need to take a solvency test. If you can show the IRS that you were insolvent — meaning that your total liabilities exceeded your total assets — before you agreed to the debt settlement, you won’t owe tax on the forgiven debt. You must pay taxes on the difference when the insolvency amount is less than the total forgiven debt.

Determining your taxable income and correctly reporting it can be complicated, so you may want assistance from a CPA or tax attorney.

4. You don’t need a new credit card or loan in the near future

Any credit card bills you paid late and any payments you missed before or while negotiating will negatively impact your credit score and credit history. In most credit scoring models, like FICO’s and VantageScore’s, your payment history is the largest factor impacting your credit score and late payments, delinquencies and collections linger on your credit report for seven years.

Even one payment that is late by 30 days or more could lower your score by 100 points or more, depending on your initial credit score and the scoring model used. Those with excellent scores will see the biggest drops, Harzog says.

Settled accounts or those put in forbearance or hardship programs, even if in good standing with no late payments, could also hurt your reputation with lenders, as it signals that you had difficulty repaying your debt as originally agreed.

Your card issuer may also close your account as part of your agreement. This could raise your credit utilization ratio, or the amount of available credit you’re actively using. Having a high ratio (above 30%) can ding your score, too, as it indicates you may be overextended and have trouble paying bills, Griffin says.

Some lenders will not report negative information to credit bureaus while you’re in a forbearance or hardship program or if you bring a late account current within 30 days, but you should ask the company about its policies while negotiating so you’re fully aware of the credit impact of any arrangement you enter.

The lower your credit score dips, the harder it will be to qualify for a new loan, mortgage or credit card and the more you’ll pay in interest costs when approved. But, if figuring out how to pay off credit card debt is your top priority, then you may not need to worry as much about your credit score potentially dropping. After all, you probably shouldn't add to your debt and a successful negotiation could allow you to get out of debt faster, and, potentially, for less than you owe.

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