8/20/2012 2:15 PM ET|
Credit card debt: How to cut a deal
More than ever, credit card companies are ready to negotiate with borrowers who are in over their heads. But know your options before you commit.
Consumer advocates and debt experts agree that credit card companies have never been more willing to cooperate with distressed borrowers than they have been lately. Issuers are lowering rates and minimum payments, offering workout plans and settling debts for 50 cents or less on the dollar.
But 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 understand the timelines involved in distressed debt.
- 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.
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, 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 lower-rate credit card (you can find offers at MSN Money, Bankrate.com, CreditCards.com, CardRatings.com, LowCards.com and Index Credit Cards, among other sites).
- 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:
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