During financial hardships the first thing that gets affected and neglected for repayment is the credit card payments. A credit card payment is an unsecured debt. There is no underlying asset which is secured to sell by the lender in case of failed payments by the borrower. If a car loan or mortgage loan is not paid the asset will be under foreclosure whereas If a credit card payment is not made then the impact will be on the credit score which will have an impact when the cardholder applies for a new loan or credit card.
When you do not pay credit card bills on time, banks’ priority towards cardholders will decrease and will hesitate to issue new debt to such borrowers. It is best advised that rather than falling into the risk of debt burden, the card holder can meet the credit card issuing bank and negotiate a debt settlement. By doing this, credit card issuers will retain you as a customer as you are willing to repay and negotiate payment terms, the relationship will be maintained in good order in the future.
Negotiating credit card debt
It is important to understand that negotiating with credit card companies can be tricky. It is difficult to change the terms for the card issuer and they will be worried about filing bankruptcy. You can negotiate with card issuers for credit card debt or you can hire professionals to do this on your behalf. The following are the ways in which you can negotiate credit card debt.
- Call the credit card issuer
- Confirm your total debt
- Present your situation
- Provide your options
- Agreement
1. Call the Credit Card issuer
You can call the credit card issuer if you have decided to handle the negotiations by yourself. Since the customer service representative will not have the authority to approve your request you will be directed to the higher authorities. Ask the credit card issuer regarding the debt settlement process, explain your hardship situation and provide your plan of action to overcome the situation. It needs a lot of negotiating skills when dealing with the authorities hence being polite and firm is the key.
2. Confirm your total debt
Before you start negotiating credit card debt, it is important to understand that the card issuer wants you to repay debt. If you confirm total debt before negotiating it sends a message that you are aware of your payment responsibility. It is also important to confirm your current interest rate on your account.
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3. Present your situation
Financial hardships will not remain forever it will cause a temporary difficulty and over a period of time you can recover from the situation. Explain in detail about your financial crisis, past repayment history and future course of action that you have taken to perform. The card issuer will look into the past performance and the present situation then decide to take some actions. If a borrower has a credit card default history and still wants to negotiate then the card issuer may not get convinced in the process of negotiation.
4. Provide your options
When you negotiate your credit card debt, provide with your options for repayment. When you provide your options for repayment, the card issuer will get convinced that you will repay the debt on time. Look into your financial situation and decide if you are able to make a lump-sum settlement or work out a hardship agreement. You are the best judge of your situation and you know better about your financial situation than others. If the card issuer is not satisfied with your options they may take hard decisions which will impact you directly. Banks may issue orders to freeze your credit card account.
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5. Agreement
You need to negotiate many rounds of discussions. If you handle negotiations with a professional, then they will proceed accordingly. Once the card issuer accepts debt settlement and agrees for terms and conditions, you can make a written agreement of the same. You should take every step towards repayment of the credit card debt as it is the most important part of debt settlement.
What you should not do while negotiating debt?
Debt negotiation is a good way to reduce your debt and get relief from overall creditors. While you are bargaining with your creditors you should avoid certain common mistakes and increase your chances of successful negotiations.
- During the negotiation process do not be arrogant and demand. Be polite and respectful. Your goal is to get acceptance for time and save reputation.
- When you are presenting your situation to the manager, be genuine and explain your situation. Financial hardships are temporary and can happen to anybody.
- Be realistic and provide your options for debt settlement; do not build castles in the air, as bankers can ask for documentation.
- Do not try to convince your creditors with false promises and fake business deals. Card issuing companies will conduct a thorough verification.
- During the negotiation process the creditors will call and demand payment. You should handle the situation carefully and should continue until all negotiations are finalised.
- Do not put your direct deposits or reserve funds in bank accounts which are associated with your credit card. Banks can have access to your accounts when you go for negotiations.
What you should not do with credit card debt?
There are no rules that are set by the card issuing authority that credit card money should be used only for any particular purpose. This is the reason that credit cards are misused and sometimes irresponsibly used that makes the card user fall into a debt trap.
Do not use credit card for paying unsecured debt– Do not use credit card for making payment towards home loan or car loan or any kind of unsecured debt. If the card user is unable to pay for car loan or home loan then the risk is higher. Card users will lose the secured asset for which the payment is made and also the credit card bill remains outstanding.
Do not use retirement funds to repay debt- Your retirement money is set for a purpose, that money will come handy when you are retired. If you use a credit card for repaying the debt then you are falling into the debt trap because you are hitting the money which is set aside when you cannot earn during your old age.
Types of Debt Settlement
Credit card issuers will agree for one of three types of settlements which are listed below.
- Lump sum settlement
- Work out agreement
- Hardship agreement
1. Lump sum settlement
Lump sum settlement is one time payment settlement where the debt amount will be repaid by the credit card user. For example, if you owe AED 4,000 including interest and fees on your credit card, then if you ask the card issuer to accept AED 2,500 to settle the account in full by forgiving the rest balance amount.
2. Work out agreement
In this type of agreement the credit card issuer will reduce the interest rate or they will temporarily waive the interest. The bank will also provide other chances of clearing the debt and these include reducing the minimum payment amount and also waiving the late fees on your credit card account.
As part of your agreement they may also choose to close your supplementary account so that you will not be burdened with additional supplementary card usage charges. By closing your credit card account, credit utilisation rate may also increase.
3. Hardship agreement
If your financial crisis is temporary and you have higher chances of recovery from the debt, then the bank will have the option of agreeing on a hardship agreement. Hardships such as sudden loss of job or unexpected illness or accidental injury where you are unable to work and earn to pay your debts. You can ask your bank for a hardship agreement where the bank may reduce your interest rates and also suspend late payment fees. Banks can also reduce the minimum balance payment.
Unfortunately, the credit score will get affected due to the hardship agreement and banks may report negative information to the credit bureau during this period.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
