If you are having trouble making payment on an unsecured credit card, recent changes in the law and the recession have dramatically improved your ability to negotiate favorable terms with credit card companies. Here are some options, depending on whether you want to keep or get rid of your card.
(To learn more about credit cards, including how to choose one and how to avoid debt, see our Banking & Credit Card area.)
If you want to keep your credit card, you may be able to get a great deal from your credit card company. According to an August 2009 post in the Consumer Reports Money Blog, credit card companies are lowering interest rates, reducing monthly payments, eliminating fees, referring customers to debt management programs, and even reducing balances owed. Call your credit card company and ask for an interest rate reduction (which will also lower your payments), elimination of fees you have been charged for late payments or over-the-limit charges, smaller monthly minimum payments (if you need that for a short time), or even a reduction in the balance you owe.
You may be able to settle your credit card debt for a third to half of what you owe. Credit card companies will ordinarily not offer such a deal until you are several months late. Now however, some are reaching that point after three, rather than five or six, months. Usually, the company will require you to pay the settled upon amount in one payment or several payments. If you are already struggling with debt, it might be difficult to get a lump sum large enough to settle.
Alternatively, if you can’t pay anything on your credit card and have decided that keeping the card isn’t essential, one option is to stop making payments. Of course, there will be negative consequences. You may lose your credit privileges. You may be sued, but that will take some time. Your credit report will make you look like a riskier borrower, so other creditors will likely not offer you the best interest rates on new credit, if they offer you credit at all. And, of course, missed payments will bring down your credit score. However, the hit to your credit may be less severe than if you lose your home or car.
In 2009, Congress passed, and the president signed a law that stops many credit card traps consumers had been complaining about for years. For the most part, the new (as well as the old) protections only apply to consumer credit cards and not to business credit cards, credit cards secured by your home, or debit cards. The new law is referred to as the “CARD Act” or the “Credit Card Act.” (To learn more about this law, see The Credit Card Act: More Protection for Cardholders.)
When you are negotiating with your credit card company, it’s important to know what it can and cannot do. For example, card issuers can no longer raise the interest rate on the outstanding balance on its card just because you didn’t make the minimum payment on another credit card. The CARD Act also places limitations on the ability of card issuers to raise your interest rate during the first year you own the card, and require advance notice (often 45 days) before raising your rate in other circumstances. And if you decide to close a credit card account, under certain circumstances the card issuer cannot demand that you pay the entire balance at once.
If you opt to pay only the minimum (or less) each month, you’ll need years to get out of debt. For example, if you charge $1,000 on a 17% credit card and pay it off by making the minimum payments of 2% of the balance each month, you’ll take more than seven years to pay off the loan and will end up paying more than $1,760. If the balance is $8,000, it will take over seven years and cost over $8,700 to repay.
The CARD Act requires credit card statements to show you how long it will take to pay off your balance if you pay just the minimum payment (and don’t add any more charges) and the total amount you would pay over that period of time. Your statement also must show the amount your monthly payments would have to be in order to pay off the balance in three years. You can also use Nolo’s credit card repayment calculator, to find out how long it will take you to pay off your balance (and your total cost) for various payment amounts.
It might make sense to make minimum payments in certain circumstances. For example, if you have more than one credit card, consider making minimum payments on all of your cards except one, and then put any extra cash into paying off completely the outstanding balance on that one card. Once you’ve paid that balance off, start with another card, and so on, until you pay off the outstanding balances on all your cards.
If you can’t make even the minimum payments on all your cards, and you haven’t been able to get the company to make substantial reductions in the balance, you could try to negotiate temporary reductions in the minimum payment (or interest rate, which will reduce the minimum payment somewhat) on as many cards as you can. Using the Nolo credit card repayment calculator, you can be realistic in figuring out how long it would take you to pay off one card with the extra money saved from reduced minimum payments on the other cards. Then propose that time period for a temporary reduction in minimum payments to the other credit card companies. With the company you plan to pay off first, you may have different balances with different interest rates. Under the CARD Act, any extra money you pay above the minimum payment will automatically go to the balance with the highest interest rate so you can pay it off first.
If you are unsuccessful in negotiating lower interest payments, a lower balance, or reductions in fees or interest on your own or feel that you could use some help, try contacting a nonprofit credit counseling agency such as Consumer Credit Counseling Services. (See Choosing a Credit Counseling Agency to find a legitimate organization.)
In addition, the CARD Act requires credit card statements to include a toll-free number where you can get contacts for three (if available) credit counseling agencies serving your area. Because contacts can only be provided for agencies approved by the U.S. Bankruptcy Trustee, you have some hope that the agencies will be legitimate. Even so, you should check out carefully any agencies you contact, as it often takes a while for a government office to find out that a company is engaging in fraudulent or abusive business practices.
For more articles on managing debt, see the articles in Dealing With Debt: When You Can't Pay Your Bills.
This is an excerpt from Nolo's Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Margaret Reiter and Robin Leonard.