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

Negotiating credit card debt can most definitely help you to dig yourself out of a financial hole, but the cost to your credit score may be something you decide is too high. Whether or not this is the case depends largely on your individual circumstances prior to negotiation. It also depends on being very persuasive with creditors about what terminology is used on your credit report.

Types

Credit card debt negotiation may simply involve asking creditors to lower your interest rates so that you can apply more of your payments toward the principal rather than toward interest payments. Negotiation can also take the form of changing your payment schedule, or partial debt settlement. Be aware that debt settlement is usually only an option after 90 days of delinquency with your creditors, and should be seen only as a last resort. Debt settlement usually requires creditors to close your accounts, which should also be taken into consideration.

Effects

How dark a mark negotiated credit card debt will leave on your credit report and score depends largely on how much debt you already have, as well as your debt-to-credit ratio. Credit scores consider your debt-to-credit ratio very important, so the more open credit accounts you have, the more existing credit lines are reflected. The lower the debt you have charged on those accounts, the lower your debt-to-credit ratio is. When a creditor closes your accounts, particularly if you have a lot of other existing debt, your debt-to-credit ratio can increase, lowering your credit score significantly. If you do not have a lot of existing debt, however, such an account closure may not make as big an impact on your credit score.

Considerations

A closed account on your credit history is not, in and of itself, a bad thing. After all, account closure may have been initiated by you, the cardholder. However, if your credit card issuer notes that they forced closure on your account, that can reflect negatively on both your credit history and score. Similarly, if a creditor marks that your account was "settled," a term that indicates that they accepted less money than was due them, your credit score will be negatively impacted.

Prevention/Solution

When negotiating your debt, ask about the specific terminology your creditor will use when reporting the account closure. If you feel comfortable with pushing the issue, try to make sure it only says the account was closed, not by whom, and that it was paid in full. How comfortable you feel will depend in part on your past history with each individual credit card company, and your success rate will also likely depend on that, as well.

Additional Concerns

Debt that is forgiven by creditors, even if it is only partially forgiven, may still be taxable. Consult a tax professional when you are calculating your tax returns for the year in which the debt was forgiven in order to make sure you comply with all applicable tax laws. It will also remain on your credit report for a maximum of seven years. The older that item on your credit report gets, the less it will impact your credit score, but any damage inflicted will come while that item is still fresh on the report.