Bad credit is never a good thing.
Not being able to qualify for most loans and paying high interest on the loans that you do have can be very expensive. Not to mention, the debt collector calls, and more.
Nonetheless, if you can afford to pay just about anything toward your debts, even if it’s not everything they’re asking for, chances are that you can negotiate your way to clearing your name and earning better credit.
Here’s where to start:
Understand Your Rights
First and foremost, if you’re dealing with debt that seems overwhelming, one of the first things that you should do is get to know your rights.
There’s an act called the Fair Debt Collection Practices Act that was enacted in 1978. The act provides strict guidelines as to how, and even when, debts can be collected.
Violations of this act could lead to the debt collector owing you money, and at the very least, can become a weapon in the battle that is debt negotiation. Debt Consolidation has a great guide on dealing with debt collectors. This is a great place to start when brushing up your knowledge with regard to your rights.
Get To Know Your Debts
If you’re like most borrowers, chances are that you know a round figure of how much money you owe and who you owe it to.
However, do you know exact amounts?
How about interest rates, fees, and if the debts are in collections, who holds them? Before you start negotiating, it’s important that you get a solid understanding of exactly what you owe and who you owe it to.
Figure Out The Goal Of Your Negotiations
Depending on where you are with your debts, your goal may differ.
For instance, if your debts are still in relatively good standing, meaning that payments have been made on time, or have been late here and there, but have been paid, your goal is likely going to be to reduce your interest, and thus, the overall cost of your debt.
On the other hand, if your debt is in collections and you want to deal with it as quickly as possible, your goal is going to be to pay off your debt at a percentage of the amount owed. Nonetheless, before you start to negotiate, it’s important to know what you’re working toward.
Call Your Lenders
Now that you know what you’re working toward, it’s time to get started. Call the lenders or debt collection companies that hold your debts. All of the conversations will likely be the same.
Start the conversation by saying that you are working to improve your financial stability by paying off your debts. However, the current terms of these debts are becoming overwhelming to meet. Therefore, you’d like to see what can be done to work out an offer that would be good for both, you as the borrower, and your lender.
If you’re looking to settle your debts with a debt collector, explain that this is exactly what you’re trying to do, and make a starting offer to do so. In general, a good starting point is 55% of what you owe.
Chances are, this won’t be the outcome, but it gives a ton of room for negotiation and each percentage point is another bundle of dollar signs.
From there, continue negotiating until you meet in the middle. However, always remember not to take the first offer, there’s almost always another option!
If your goal is to reduce your interest rate, there are two ways to start the negotiation:
- As A Borrower Looking For Help – If you’re struggling to make ends meet and need a lower monthly payment, what you’re looking for is a financial hardship program. These programs are developed by banks and could lead to 0% rates for the life of the debt. Start this conversation by explaining to your lender that it is getting harder to pay your debts. Explain that you know you owe the money, and intend on paying, but are looking for help. From there, ask if there are any programs that can help reduce your payment. You may be surprised at just how much your lender is willing to help.
- As A Long Term Customer Demanding Better – If you’re not having a hard time making ends meet, but you feel as though you deserve a better rate, the conversation will be a very different one. Call your lender and say something to the effect of, “I was combing through my credit card bills and saw that you have the highest interest rate. I see balance transfer offers every day, but I’d rather not transfer if I can avoid it. But, I’m not going to continue paying this high of an interest rate. What can you do to keep my business?” If you’ve been a long term customer that has proven to pay on time, chances are that your lender will work with you!
Final Thoughts
While dealing with debt and improving credit may feel like two separate overwhelmingly difficult tasks, they are both one in the same. Once your debt is under control, you’ll likely see notable improvements in your credit score.
Perhaps more importantly, when you start to take control of the problem, you’ll likely realize that it’s not as difficult to handle as you once thought.
It all starts with a simple negotiation that could not only make you more comfortable with paying off your debts, but save you hundreds or thousands of dollars in the process.