Consumer Tips for Settling Credit Card Debt

June 24, 2009, Written By Justin Hefner

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 could worsen a poor credit score, it does remove some of the weight from the burden of debt. Experts suggest that cardholders be proactive and try to work out a solution to 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 6 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 now under stress and, in some cases, they may be more willing to work with cardholders to create a payment plan.

Where should consumers start?

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 adjustment could result in reducing the amount outstanding or working out a payment plan that could work for both sides. Document all conversations, including the person with whom you spoke, 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. ( http://www.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 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 ( http://www.nfcc.org/ ) 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 finished, 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.


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The information contained within this article was accurate as of June 24, 2009. For up-to-date
information on any of the terms, cards or offers mentioned above, visit the issuer's website.


About Justin Hefner

Justin Hefner is in the education field and has written about a number of financial issues. He holds a Bachelor of Arts degree from Texas Tech University and a Masters in Education from Texas State University.
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