Life is tricky. Sometimes you can be the most responsible person you can be, and yet find yourself over your head in debt. Credit cards are a great way to make purchases, but sometimes credit can spiral out of control. Perhaps you unexpectedly lose your job or incur a large unexpected expense.
You may think that a credit card company will be totally unsympathetic to your plight. That’s not the case. The only thing banks want is for you to make good on your obligation, and they’ll usually take less than they are owed if it means collecting their principal in full.
The reason is that if you default on your payments, you will get sent to collections. The bank is much less likely to collect back its principal, and often has to sell off the debt for pennies on the dollar. They don't want that.
That means you have some leverage, which means you can negotiate to lower your interest rate. Let’s walk through the process.
Step 1: Accept the problem
It doesn’t matter why you are in this situation. It’s OK to be human. We all make mistakes, and/or sometimes things just go awry. Once you’ve acknowledged that there’s a problem, now it’s time to correct it.
Step 2: Figure out what you can afford to pay
Make a personal balance sheet. Write down all your assets in one column, and your debts in a column next to it. Now make a monthly budget. Write down all the money you take in each month as income. Subtract from that all your monthly expenses, including the amount you pay monthly on your credit card, especially noting the amount of interest paid.
From this, start substituting lower amounts for the interest payment until you reach a number where you can afford to make those same payments. If you are presently paying 14% APR, and you can survive if your interest payments are cut in half, then you want to get the APR down to around 7%. That’s the number you need to remember.
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Step 3: Contact your credit card companies
Be honest and tell them you are struggling. Make it clear that you want to fully honor your obligation, but that if the interest rate is not lowered, you are “likely to default on principal.” If you have a good track record, the bank will be more inclined to work with you. They’ll likely ask what rate you need. Tell them it needs to come down to 3% for the next 12 months, and then you’ll revisit the matter.
They’ll do some internal risk assessment and offer a new rate. If that new rate is at your 7% target or less, thank them profusely and take the deal! If not, thank them, tell them you’ll run the numbers and get back to them. Then call back a day later, and tell them the reduction is appreciated, but it just isn’t going to work. You asked for 3%, so now come up to 5%, and keep going back and forth until there’s a deal or they refuse to come down any further.
Step 3A: If it isn’t going well ...
If the credit card companies are giving you a hard time, you have to play hardball. It’s just as necessary for them to get on board as it is for you.
Try to arrange a conference call with all the credit card companies, and ask for supervisors to be on the call. It may be difficult to pull off, but if you couch it as being necessary or you guarantee you will default on the entire balance, you might get their attention. Tell them you really want to make good on your debts, but that none of them are willing to budge, and as a result, you are going to default at some point on one or more of them. By not disclosing which will get dinged, they’ll likely be more forgiving about negotiation. They can negotiate among themselves to hopefully get down to a blended rate you can live with. It’s good to work together.
Step 4: Check in
Call the card companies up every three months, just to let them know how things are going. They are more likely to see you as an honest person trying to work things out if you call them for no reason other than to check in. If you have to repeat the rate reduction process, you’ll have a good communication track record.