Monday, July 6, 2009

Credit Defaults: Don't Wait -- Negotiate

Credit card default rates are now above 10 percent for several major issuers, meaning some banks might not get paid back on more than 10 percent of their credit card loans, which are unsecured.

To cut their losses, issuers have been be more willing to negotiate a payment plan or settle accounts with card holders.

"While settlement and payment plans may relieve a bit of the pain for issuers and cardholders, this is not an ideal solution. It is merely a way out to avoid total loss. For cardholders, it means their financial situation is so difficult that they can't pay anything on their loans," said Bill Hardekopf, CEO of and author of The Credit Card Guidebook.

"They probably already have a poor credit score and settling their debt could make it worse, but it does remove some of the weight from the burden of the debt. For issuers, they are losing money on loans, but at least it isn't a total loss," he said. simplifies your shopping for credit cards. It is a free, independent Web site that helps consumers compare credit cards across a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card.

Hardekopf said cardholders struggling to meet payments should be proactive and try to work out a solution that avoids more serious financial problems.

Bank of America, the largest bank in the U.S., reported that its default rate jumped to 12.5 percent in May, up from 10.5 percent in April. American Express said its default rate rose to 10.4 percent from 9.9 percent.

Defaults are expected to climb as the recession lingers.

That trend is troublesome for card issuers, Hardekopf said, because they have to write the balance down to zero once a person has been delinquent for six months. They may continue to try to collect the debt through a collection agency, but they must post 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, he said.

Here are some steps to consider:

*Start with trying to adjust interest rates and fees.

If you can make some monthly payment, ask the issuer to lower your rate and waive your fees. That could make a big difference in how much of your debt gets paid 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. Document all conversations, including whom you spoke with, the date, time, and the results.

Remember: persistence, persistence, persistence.

*If you are already in default, 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. The service can be reached toll free at 1 (866) 941-1030.

Operators will provide information about contacting credit card issuers and accredited credit counseling agencies. Consumers can also get help and information through a website,

*If you are close to or over 90 days past due on your account with no hope of paying it off, talk directly with your credit card issuer about debt settlement.

Credit card companies might be able work out a settlement whereby 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 will affect your credit score for several years.

Also, income taxes must be paid on any forgiven debt greater than $600. You would need to file Form 1099-C with the IRS.

*Do not respond to ads from debt settlement companies promising 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 about the same success. In some cases, scammers have disappeared with the funds, making 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 is a good place to start, Hardekopf said.

The foundation has a Debt Management Plan for paying down outstanding balances through monthly deposits to a credit counseling agency, which would then distribute the funds to creditors.

It takes approximately 36 to 60 months to repay debts through such a plan, but once finished, it can help re-establish a positive credit history. Fees include a $25 counseling fee and a $10 to $25 monthly fee for administering the plan.

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