In this article:
- Credit Card Issuers Rarely Forgive Your Debt
- How to Negotiate Credit Card Debt
- The Bottom Line
If you're having trouble paying your credit card debt, you might be hopeful that your credit card issuer will forgive debt you're unable to pay. Credit card debt forgiveness is rare, but you may be able to reduce your credit card debt in other ways. Make sure you understand your options and how they could affect you in the near and long term.
Here's what you should know about lowering or even eliminating your credit card debt.
Credit Card Issuers Rarely Forgive Your Debt
When you open your credit card account, you agree to the issuer's terms and conditions, which include your promise to repay debt. Unless there is a compelling reason why you should not be responsible for your debt (in the case of fraud or identity theft, for instance) there's little chance that your issuer will let you off the hook for your balance.
How to Negotiate Credit Card Debt
While you may not be able to have your credit card debt forgiven, there are some steps you can do to make it more manageable.
Work Directly With the Credit Card Issuer
If you are financially affected by a natural disaster or declared emergency, or are experiencing general financial hardship, you should quickly let your creditors know what's going on—even if you haven't yet missed a payment.
When making contact with your credit card company's customer service team, the Consumer Financial Protection Bureau suggests that you be prepared to provide information, including:
- Why you can't make the minimum payment
- How much you can afford to pay
- When you should be able to restart your normal payments
- The new payment amount that would work for you, and for how long
This information may help your issuer work out a more feasible payment plan based on your circ*mstances. For instance, you may be able to negotiate different options like a credit card hardship plan, which can provide some financial relief while you get back on your feet.
Some options with a credit card hardship program could include negotiating a lower interest rate or minimum payment, or even waiving late fees. In some cases, you may be able to pause payments without late fees, as well.
Tread carefully, though, if you're concerned about your credit score. While temporary relief from your payments is welcome, your credit score could suffer if the arrangement lowers your credit limit or closes your account. A lower credit limit (or closed account) can cause your credit utilization rate to jump, especially if you have high debt on other cards. Credit utilization is one of the most important factors in your score, so preserving your credit limit could help you protect it.
Finally, you should know that your card issuer is not obligated to accommodate your request for forbearance. Although some credit card companies have been accommodating these requests in recent years due to the pandemic and related recession, there's no guarantee that you'll have this option.
Set Up a Debt Management Plan (DMP)
You may be able to set up an arrangement known as a debt management plan (DMP). Offered by credit counseling organizations, these plans may succeed in getting your creditors to waive fees and lower the interest rate on your accounts if you agree to fully repay the debt over time.
As part of your DMP, the credit counselor you're working with will collect a single monthly payment and distribute it to your creditors. Plans are typically structured so your debts are fully repaid within three to five years. Interest typically still accrues on accounts that are part of the DMP, but your issuer may offer a lower rate.
Downsides to using a DMP include:
- DMPs don't cover installment debt, such as student loans or mortgages
- You'll have to close the credit cards that are part of the DMP
- You may have to stop using credit cards that aren't part of the DMP while it's active
- You'll pay a monthly fee to the credit counseling agency
Although a DMP can be a great way to get back on track with your credit card payments, it comes with some consequences that may not be ideal for you.
Work With a Debt Settlement Company
Debt settlement companies may be able to settle your debt for a lower amount. For example, if your credit card balance is $5,000, they may be able to settle it for $2,500. The strategy relies on the assumption that a creditor would prefer a portion of your debt to be paid if it would prevent you from defaulting on the account.
While it may sound like a good solution, debt settlement is typically viewed as a last resort before bankruptcy. It can be fraught with risk (and scams), and there's no guarantee that the service you've paid for will be effective. As mentioned, credit card companies are not obligated to settle your debt, so you may not get the results you're looking for with this route.
Debt settlement can also result in damage to your credit as you may be asked to stop making payments on your debt while the debt settlement company attempts to negotiate with your creditors. Instead of paying your bills, you'll make payments toward an account the debt settlement company controls so they can offer the balance of that account in lieu of the total amount you owe. Because payment history is the most important factor in your credit score, all those missed credit card payments will likely cause your score to plummet.
Consolidate Your Debt
If your credit utilization ratio is modest and your credit score hasn't decreased significantly, you might be eligible for a debt consolidation loan. These loans allow you to pay off your existing debt with a lower interest rate you'll repay in fixed monthly payments.
And if you're a homeowner, you may be able to tap the equity in your home and pay off your debts with a home equity loan or home equity line of credit. However, the hazard with this type of credit is that you risk losing your home if you're unable to pay off debt.
Declare Bankruptcy
Filing for Chapter 7 bankruptcy could discharge (forgive) all of your credit card debt. However, bankruptcy should only be considered as a last resort option due to the lasting damage it will cause to your credit. Bankruptcy will remain on your credit for up to 10 years after the filing date. Filing bankruptcy is also costly and may require you to sell possessions to cover your debts.
The Bottom Line
Drowning in credit card debt can seriously hamper your quality of life and ability to build wealth. While you're experiencing financial hardship, finding a way to reduce your debt can be a great help.
If you decide to use one of the options mentioned above, consider using a free credit monitoring service like the one from Experian that can help you keep tabs on how your credit score will be affected as you make special arrangements to reduce or eliminate your credit card debt.
