When it comes to repaying debts, people typically prioritize assets they can lose, like their house or car, despite credit card debt often carrying the highest interest rate. Don’t avoid your debt. Credit card debt can quickly spiral out of control, leaving you wondering if bankruptcy is the only answer.
Reaching Out to Your Lenders
Before you default on a payment, reach out to your credit card lenders. This puts you in a good position for a hardship program, lower interest rate, or temporarily reduced payment plan. Being that proactive isn't always realistic, but even if you've fallen behind, pick up the phone and call. Ask what options are available, since many lenders would rather work something out than risk getting nothing at all.
Options Worth Asking About
Make sure you’re prepared for the conversation and know what to ask for:
- Hardship plans: Creditors may offer temporary relief for situations like job loss or medical emergencies, usually with a reduced payment, paused payments, or waived fees for a few months while you get back on your feet.
- Lower interest rates: Ask your issuer to reduce your APR so more of each payment goes toward the actual amount instead of interest, which will ultimately help you pay off the balance faster.
- Payment arrangements: Ask for a restructured monthly plan with a lower payment that allows you to pay off the full balance but on more manageable terms.
- Settlement offers: Ask to pay a lump sum for less than you owe, with the rest forgiven. This is typically an ask if you’re more seriously behind. Be warned, settling for less than you owe can hurt your credit score since the account gets reported as "settled" rather than "paid in full.”
Pros and Cons of Negotiating Debt on Your Own
Pros
- It's Free: Negotiating with your credit card company yourself costs nothing.
- Avoid Scams and Predatory Companies: Some companies, including debt settlement companies, use predatory tactics with high fees, bad advice that can hurt your credit more, or are a scam.
Cons
- Not Knowing What to Ask For: Do-it-yourself negotiations mean you're relying on your own research to know what a creditor might actually accept, which can lead to asking for too little or too much, and getting nowhere.
- Risk of Costly Mistakes: Without professional guidance, small errors like missing a deadline or misunderstanding an agreement can lead to added fees, higher interest rates, or even legal action.
- Can Be Overwhelming: Juggling calls, documentation, and terms with multiple creditors can be hard to manage alone.
An Alternative: A Debt Management Plan (DMP)
A debt management plan through a nonprofit credit counseling agency provides the professional help you may be looking for. They will negotiate on your behalf for a reduced interest rate and consolidate your credit cards into one affordable monthly payment. While enrolling in a DMP costs a small fee (around $40 a month), it will ultimately save you time, money, and unneeded stress.
Whichever path you choose, taking that first step is what sets you on the way to repayment.