Consumer advocates and debt experts agree that credit card companies have never been more willing to cooperate with distressed borrowers than they are right now. Issuers are lowering rates and minimum payments, offering workout plans and settling debts for 50 cents or less on the dollar.
But not everyone is getting the help that’s needed.
Rosemarie is 59 and disabled, and has had trouble making the minimum payments on her $12,000 credit card debt since her interest rate soared to 30%. She asked for relief but didn’t get it.
“I was late making a few payments, and now they are charging me over $300 a month in interest,” Rosemarie wrote me. “I called asking if they could lower the interest, (but) they said no. . . . What can I do?”
Cutting a deal with your credit card company typically isn’t easy or simple.
Issuers don’t have enough workers to deal with all their delinquent accounts, which can make it tough to find someone who can help, said Michael Bovee, the president of the Consumer Recovery Network, a debt-settlement company that also teaches people how to resolve debt problems on their own. Plus every issuer has different policies and procedures, and those may change over time, further complicating your negotiations.
But it is possible to cut a deal if:
- You’re clear about the state of your finances and what you can afford.
- You’re willing to let your credit scores take a hit.
First, you have to be in trouble
It’s an unfortunate reality that most issuers won’t start offering real solutions until borrowers begin missing payments, credit experts said.
“The further behind you fall, the more eager they (credit card companies) are to work with you,” said Gerri Detweiler, a personal-finance expert for Credit.com. After you miss a payment (or two or three), issuers may offer forbearance or hardship programs that reduce interest rates and minimum payments for three to six months.
Credit counseling or debt settlement?
As you fall further behind, they may progress to workout plans that allow you to pay off your debt at a reduced rate over several years and, beyond that, offer settlements for less than what you owe.
But the help comes at a steep price. A single missed payment can knock more than 100 points off good credit scores, as I wrote in “5 ways to kill your credit scores,” with subsequent late payments doing further damage. Settlements compound the injury, because you’re paying less than what you owe, something that lenders and credit-scoring formulas view as a big black mark.
So before you pick up the phone to start negotiating with your credit card issuers, make sure you don’t have better alternatives.
If you still have good credit scores, for example, you may be able to transfer your debt to:
- A three-year, fixed-rate personal loan from a credit union or bank.
- A three-year, fixed-rate loan from a peer-to-peer lending site such as Prosper or Lending Club.
Regardless of your credit, you may be able to move your debt to a 401k loan or an existing home equity line of credit, but these loans are fraught with peril. Your 401k loan could become an inadvertent withdrawal if you lose your job, triggering taxes and penalties. Transfers to a retirement or home equity loan also turn debt that could be erased in bankruptcy court into debt that can’t, so use these loans only if you’re sure you can pay them off.
Don’t grab just any lifeline
If none of these alternatives will work for you, it’s time to take a close look at where you stand and what you can afford to pay your credit card companies. You need to:
- Work out a budget. Review all your expenses to see what nonessentials can be cut to free up cash for your cards. MSN Money’s Managing Your Budget Decision Center can help. Make sure your budget is realistic, though; if you try to get too Spartan or fail to include all your expenses, you won’t be able to stick to your plan. “Make sure you have a good handle on what you can pay and what you can’t pay,” Credit.com’s Detweiler said. “You want to be able to put food on the table and gas in the car” before you think about paying nonessentials. (For more, read “How not to pay your bills.”) Agreeing to a payment plan you can’t afford is counterproductive, the credit experts said, because you’ll lose all credibility if you fail to make the agreed-on payments and the issuer may respond with hardball tactics.
- Get realistic about your situation. If your financial setback is truly temporary, a short-term forbearance or hardship plan may be all you need to get through a rough patch. Issuers can reduce your interest rate and minimum payments for a few months and may waive fees to make your debt more affordable. Some even offer to erase any earlier late payments from your credit reports as long as you make subsequent payments on time, Detweiler said. But if you won’t be able to afford your payments once the forbearance ends, you may need a more drastic solution, such as a workout arrangement or a debt settlement.
A workout typically allows you to pay off your balance over several years at a reduced interest rate. Some issuers offer these plans directly to borrowers, while others require you to use a debt-management plan offered by a legitimate credit counselor, such as one affiliated with the National Foundation for Credit Counseling. You won’t be able to use your cards during the workout period, and it may have implications for your credit, as I discuss in “The consumer’s guide to credit counseling.”
Continued: Do it yourself?
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Do it yourself?
Some borrowers may prefer to go to a credit counselor rather than try to handle negotiations on their own, said Connie Prater, a senior writer for CreditCards.com. Credit counselors know exactly whom to call at each issuer to put a debt workout plan in place, and they can help with budgeting.
“Some people just don’t feel comfortable doing this on their own,” Prater said. “It can help to have a credit counselor hold your hand and call on your behalf.”
Credit counselors, however, must accept the rates and terms that have been dictated by the issuers, which may not be as beneficial as what a consumer could negotiate on his or her own, Bovee said. For example, most debt-management plans have rates in the 9% to 11% range for a five-year plan, he said, while one issuer-provided workout plan currently offers rates of less than 1%. Also, you’ll be expected to pay your entire principal back in full. Credit counselors don’t offer debt settlement.
Another issue: You may not qualify for a credit counselor’s debt management plan if your bills are too big for your income. In that case, bankruptcy or debt settlement may be your only options.
If you opt for the do-it-yourself route, keep a notebook and pen by the phone, and make good notes of every conversation you have with your creditors, Detweiler advised. Stay calm and ask for a supervisor if the person you’re talking to isn’t cooperative.
“The first person you get on the phone is likely to be the least knowledgeable and the least helpful,” Prater said. “Continue to go up the line until you get someone who can answer your questions.”
Once you have an agreement with your issuer, make sure to get everything in writing, including how the deal will be reported to the credit bureaus.
But whether you should make the first call — or wait until your creditors contact you — is a matter of debate.
Prater recommends people call their issuers as soon as they realize they’re in trouble, although she acknowledges that this early warning may result in issuers reducing credit limits or freezing accounts. Bovee believes consumers should stay in touch with their credit card companies once they’ve fallen behind but doesn’t recommend signaling distress before then.
The trouble timeline
Here’s what you can expect from your credit card companies:
Up to 90 days late: Your credit card issuers will contact you to find out why you haven’t paid. Keep your answers simple and brief, Bovee said, such as “I’ve lost my job and can’t pay. I’ll be in touch with you when I can pay.”
You can say that your income has been cut, but don’t discuss the amount of that income or your available assets, Bovee advised. If you’re offered a solution that actually works for you, such as a forbearance to tide you over a temporary setback, you can take your issuer up on the offer, he said. Otherwise, keep repeating that you can’t pay and will be in touch when you can.
91 to 180 days late: At 90 days, your debt is typically transferred to a recovery department that is better trained to deal with distressed debtors and that is able to offer more options, including possible workout plans, Bovee said, although some issuers transfer the debt earlier, around 60 days. As your debt approaches the six-month mark, many recovery departments will offer settlements.
“You don’t start out asking for settlements. You let them bring it up,” Bovee said. Once they do, a consumer can reasonably expect to settle for 40 to 50 cents on the dollar, Bovee said. Although having a lump sum to settle your debt will make negotiations easier, you typically can pay a settlement in three monthly installments, he said. The Internal Revenue Service considers forgiven debt to be taxable income, so you should also set aside some money to cover the tax bill.
But don’t pass up a deal you can afford hoping to get a better offer, Detweiler warned, because the better offer might not come. “You should pay what you can afford to pay,” she said.
181 days to 365 days late: At the six-month point, your issuer charges off your unpaid balance as bad debt and gets a tax break worth about 35% of the charged-off total. The damage done to your scores by a charge-off is similar to what’s done by a settlement. The issuer then typically transfers or sells the debt to collectors, either internal or external. When it shows up on your credit reports, the collection account further damages your credit scores.
Collectors tend to be more aggressive in their efforts to get you to pay but also may be willing to settle your account for less than the original creditor. Then again, you may get sued.
“Creditors can file suit prior to charge-off, but it happens very seldom,” Bovee said. “While the risk is low in month seven, it increases each month and exponentially after 12 months of nonpayment.”
If you do get sued, you may still be able to settle — or you may need to seek the protection of bankruptcy court.
Liz Pulliam Weston is the Web’s most-read personal-finance writer. She is the author of several books, most recently “Your Credit Score: Your Money & What’s at Stake.” Weston’s award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board and helps middle-class families cope at Building a Brighter Future.
Published March 5, 2010