Can You Negotiate Credit Card Debt Without Affecting Your Credit Score?

by Ciele Edwards, Demand Media
    Negotiating your credit card balance severely injures your credit rating.

    Negotiating your credit card balance severely injures your credit rating.

    If your credit card debt is financially overwhelming, and the prospect of paying it all off seems impossible, negotiating with your credit card company for a lower balance is probably an attractive option. Should your credit card company agree, it will settle your outstanding debt for less than you owe. While debt settlement is a lifesaver for some distressed debtors, it almost always has a negative effect on your credit rating.

    Settlement and Credit

    Even if you pay off the settlement in one lump sum, don't expect your credit card provider to simply report the account as “paid” to the credit bureaus. Your credit card company will notify the credit bureaus that you settled your account for less than the full balance. This has a considerably negative effect on your credit scores because it indicates you lacked the necessary debt management skills to pay creditors in full. That negative mark will stay on your credit history for seven years.

    Late Payments

    If debt settlement weren't bad enough for your credit, consider this: your credit card provider won't negotiate your balance until your payments are already late. If you're paying on time, the credit card company has no reason to believe you won't continue doing so. This means you'll have to stop making credit card payments to get the settlement you want. Missed payments are terrible for your credit scores. A single missed payment will cost you roughly 60 to 100 points -- and you'll need to miss several for debt settlement to be an option.

    Additional Consequences

    The portion of your debt that you did not pay is a tax write-off for your creditor. Unfortunately, a tax write-off for the credit card company translates to a tax debt for you. Federal law requires creditors to report any write-offs that exceed $600 to the Internal Revenue Service. You'll get a MISC 1099 form for the unpaid balance, which has to be counted as income on your taxes.

    Negotiate Interest Rates

    If you can't handle your growing credit card debt, ask your credit card provider for a lower interest rate. A lower interest rate means your debt accrues at a slow rate that should help you pay it off faster. According to a 2010 survey by Lending Club, a leading U.S. peer lending network, a surprising 68 percent of consumers who ask for a lower credit card rating get it.

    About the Author

    Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.

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