Consumer Tips for Settling Your Credit Card Debt

Credit card default rates are now above 10% for several major issuers. This means these banks don’t expect to be paid back on over 10% of their credit card loans. To cut their losses, issuers now appear to be more open to settling or negotiating a payment plan for your credit card debt.

“While settlement and payment plans may relieve a bit of the pain for issuers and cardholders, this is not an ideal solution. It is just a way out to avoid total loss. For cardholders, it means their financial situation is so difficult that they can’t pay anything on their loans. They probably already have a poor credit score and settling their debt could make it worse, but it does remove some of the weight from the burden of the debt. For issuers, they are losing money on loans, but at least it isn’t a total loss,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “It is important for cardholders in this situation to be proactive and try to work out a solution. Their actions could help them avoid bigger financial problems.”

Bank of America, the nation’s largest bank, recently reported that its default rate jumped to 12.5% in May, up from 10.5% the month before. American Express said its default rate rose to 10.4% from 9.9%. Defaults will continue to climb as unemployment continues to rise and the financial crisis continues. This increase in defaults means billions of dollars per year in losses for banks.

Growth in delinquencies is a major problem for credit card issuers. They must write down a balance to zero once a person has been delinquent for six months. They will continue to try to collect the debt through a collection agency, but they have to show the loss on their books.

If you are having financial difficulties and can’t make your credit card payments, now is the time to contact your issuer, explain your situation and work out a payment plan. Issuers are not under stress and, in some cases, they may be more willing to work with cardholders to create a payment plan.

Where should consumers start?

Before you jump to debt settlement, start with your interest rates and fees. If you can make some monthly payment, ask your issuer to lower your rate and waive your fees. In many cases, a lower rate and reducing the interest payment will make a big difference in how much of your debt you can pay off.

If you are in danger of missing a payment, contact your creditors as soon as you realize you have a problem. The sooner you contact them, the more willing they may be to work with you.

If the first person you speak with can’t help lower your rate or make adjustments to your account, ask to speak with a supervisor. Persistence may be necessary to find the person who can or will help you. Explain that you are in debt, the steps you are taking to repay it, and what you can pay today. The adjustments could result in reducing the amount outstanding or working out a payment plan that could work for both sides. Document all conversations, including whom you spoke with, and the date, time, and the results.

If you are already in default and unsure of what to do as a first step, don’t ignore the problem and hope it goes away. A good place to start is “Help With My Credit,” a service started by financial institutions and credit card issuers to educate and assist cardholders who are struggling to make their credit card payments. “Help With My Credit” provides a toll-free telephone number (1-866-941-1030) for consumers to call with credit card and debt issues. Operators will provide information about contacting credit card issuers and accredited credit counseling agencies. Consumers can also get help and information through a website, HelpWithMyCredit.org.

If you are in danger of default and close to or over 90 days past due on your account with no hope of paying it off, you can also talk directly with your credit card issuer about debt settlement. They may be able to help you work out a settlement where the account is closed and you pay a portion of the amount that is due.

Keep in mind that there are negatives to arranging a settlement for debt. Closing an account due to settlement is bad for your credit score and will affect your score for several years. If the forgiven debt is more than $600, you must also pay income taxes on the amount that is forgiven by filing a Form 1099-C.

Do not respond to ads from debt settlement companies that promise to cut your debt in half. They charge high fees, much of it due up front, for services that you can sometimes do yourself with about the same success. In some cases, they can even make the situation worse.

A non-profit accredited counseling agency can help you get lower interest rates and develop a debt management plan. The National Foundation of Credit Counselors is a good place to start. Their Debt Management Plan is a systematic way to pay down your outstanding debt through monthly deposits to your credit counseling agency, which will then distribute the full amount of these funds to your creditors. It takes approximately 36-60 months to repay debts through a Debt Management Plan and when you are through, they will help you re-establish your credit. Fees include a $25 counseling fee and a $10-$25 monthly fee for the Debt Management Plan.