Credit card debt: How to cut a deal

June 2, 2010 - PRLog -- Consumer advocates and debt experts agree that credit card companies have never been more willing to cooperate with distressed borrowers than they are right now. Issuers are lowering rates and minimum payments, offering workout plans and settling debts for 50 cents or less on the dollar.

But not everyone is getting the help that's needed.

Rosemarie is 59 and disabled, and has had trouble making the minimum payments on her $12,000 credit card debt since her interest rate soared to 30%. She asked for relief but didn't get it.

"I was late making a few payments, and now they are charging me over $300 a month in interest," Rosemarie wrote me. "I called asking if they could lower the interest, (but) they said no. . . . What can I do?"

Cutting a deal with your credit card company typically isn't easy or simple.

Issuers don't have enough workers to deal with all their delinquent accounts, which can make it tough to find someone who can help, said Michael Bovee, the president of the Consumer Recovery Network, a debt-settlement company that also teaches people how to resolve debt problems on their own. Plus every issuer has different policies and procedures, and those may change over time, further complicating your negotiations.

But it is possible to cut a deal if:

•You're clear about the state of your finances and what you can afford.

•You understand the timelines involved in distressed debt.

•You're willing to let your credit scores take a hit.

First, you have to be in trouble:

It's an unfortunate reality that most issuers won't start offering real solutions until borrowers begin missing payments, credit experts said.

"The further behind you fall, the more eager they (credit card companies) are to work with you," said Gerri Detweiler, a personal-finance expert for Credit.com. After you miss a payment (or two or three), issuers may offer forbearance or hardship programs that reduce interest rates and minimum payments for three to six months.

As you fall further behind, they may progress to workout plans that allow you to pay off your debt at a reduced rate over several years and, beyond that, offer settlements for less than what you owe.

But the help comes at a steep price. A single missed payment can knock more than 100 points off good credit scores, as I wrote in "5 ways to kill your credit scores," with subsequent late payments doing further damage. Settlements compound the injury, because you're paying less than what you owe, something that lenders and credit-scoring formulas view as a big black mark.

So before you pick up the phone to start negotiating with your credit card issuers, make sure you don't have better alternatives.

If you still have good credit scores, for example, you may be able to transfer your debt to:

•A lower-rate credit card (you can find offers at MSN Money, Bankrate.com, CreditCards.com, CardRatings.com, LowCards.com and Index Credit Cards, among other sites).

•A three-year, fixed-rate personal loan from a credit union or bank.

•A three-year, fixed-rate loan from a peer-to-peer lending site such as Prosper or Lending Club.

Regardless of your credit, you may be able to move your debt to a 401k loan or an existing home equity line of credit, but these loans are fraught with peril. Your 401k loan could become an inadvertent withdrawal if you lose your job, triggering taxes and penalties. Transfers to a retirement or home equity loan also turn debt that could be erased in bankruptcy court into debt that can't, so use these loans only if you're sure you can pay them off.

Don't grab just any lifeline:

If none of these alternatives will work for you, it's time to take a close look at where you stand and what you can afford to pay your credit card companies. You need to:

•Work out a budget. Review all your expenses to see what nonessentials can be cut to free up cash for your cards. MSN Money's Managing Your Budget Decision Center can help. Make sure your budget is realistic, though; if you try to get too Spartan or fail to include all your expenses, you won't be able to stick to your plan. "Make sure you have a good handle on what you can pay and what you can't pay," Credit.com's Detweiler said. "You want to be able to put food on the table and gas in the car" before you think about paying nonessentials. (For more, read "How not to pay your bills.") Agreeing to a payment plan you can't afford is counterproductive, the credit experts said, because you'll lose all credibility if you fail to make the agreed-on payments and the issuer may respond with hardball tactics.

•Get realistic about your situation. If your financial setback is truly temporary, a short-term forbearance or hardship plan may be all you need to get through a rough patch. Issuers can reduce your interest rate and minimum payments for a few months and may waive fees to make your debt more affordable. Some even offer to erase any earlier late payments from your credit reports as long as you make subsequent payments on time, Detweiler said. But if you won't be able to afford your payments once the forbearance ends, you may need a more drastic solution, such as a workout arrangement or a debt settlement.

A workout typically allows you to pay off your balance over several years at a reduced interest rate. Some issuers offer these plans directly to borrowers, while others require you to use a debt-management plan offered by a legitimate credit counselor, such as one affiliated with the National Foundation for Credit Counseling. You won't be able to use your cards during the workout period, and it may have implications for your credit, as I discuss in "The consumer's guide to credit counseling." By Liz Pulliam Weston, MSN Money.

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