Negotiating Settlement On Credit Card Debt

If you run into trouble keeping up with the payments on your credit cards then you should try to sort the problem out sooner rather than later, because negotiating settlement on credit card debts is a lot easier if you are dealing with a credit card company than it is with a debt collector.

Many people try to avoid dealing with their credit card company when they run into problems and simply ignore the problem in the hope that it will go away. It doesn't of course and the longer you leave things the worse the situation will become. Nevertheless, this is one bullet you have to bite and, if you really cannot talk to the credit card company yourself, then get a debt counselor to do so on your behalf. It is certainly better to talk to the credit card company yourself if at all possible though and it is not as difficult as you might think.

So when should you talk to your credit card company? This might seem like a stupid question but the answer is not quite as straightforward as you might think and depends very much on what you wish to achieve.

If you are simply looking for short term assistance to help you over a temporary problem then you should talk to them as soon as possible. If you have some sort of emergency with unexpected bills to pay and want them to allow you to make reduced payments for two or three months them you should explain this to them and get their agreement as soon as you can.

If, however, your problem is far greater and you want to effectively close out your account and pay off as little as you can get away with then you need to wait a while and do not want to approach them until they are reaching the point at which they will pass your account off to a collection agency. In most cases this will be once your account falls about 120 days in arrears, although with some companies such as American Express this is normally only 90 days.

To understand why you need to wait you have to understand a bit about how a credit card company works. In most cases the company will make an effort to recover outstanding payments from you but, at the end of the day, if you default on your card agreement the company will need to pursue you through the courts to get its money back and this is a very time-consuming and costly exercise. As a result, after a certain period of time (generally 120 to 150 days) they will simply sell your debt on and put their loss down as a cost of doing business. When they do sell the debt on however they will do so for mere pennies on the dollar and it is not uncommon for a credit card company to sell your debt to a debt collector for as little as 6 or 7 cents to the dollar. In other words, if you owe $2,000 they will sell your account and recover only $120 to $140.

Against this background there is little point in talking to the company until they are approaching the point at which they are about to sell your debt on because, until that point they will not wish to discuss any option with you other than the full settlement of your account. Once they are about to sell your debt on though you are in a strong position to negotiate with them and they will be far more likely to accept a reasonable settlement rather than the very low sum which they will receive from a debt collection agency.

Well, it might seem that offering anything over what the credit card company could expect to receive from a debt collection agency should be the answer but we have simplified things slightly here and, although we have painted a fair picture of how things work, it is a little bit more complicated behind the scenes.

For a number of years it has common practice for credit card companies to accept between 60% and 80% of the outstanding balance on settlement but this has begun to change within the past couple of years and a number of companies, including the Bank of America and Discover, have started to accept offers of as low as 50%. Whatever the final settlement in your own case you should start by offering a low but realistic figure such as about one third of the debt and be prepared to settle at about one half to two thirds of the debt.

One final thing to remember is that your credit report, which will already reflect the fact that your account is in arrears, will be annotated once the account is closed out. If the balance is settled in full then it will normally be marked as "Paid as Agreed" while, if a lower figure is accepted then this effective loss to the company will be reflected by marking your credit report entry as "Settled". We look in more detail at credit reports elsewhere and also discuss the subject of credit report annotations in our article entitled "How To Deal With Debt Collection Letters". However, in the vast majority of cases, credit card companies are nor open to negation when it comes to changing the annotation to your credit report for a less-than-full settlement of your balance.

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