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Debt Consolidation Facts

1. If you spend more than 50% of your credit limit every month, this indicates to the Credit Bureau that you do NOT have enough cash on hand to meet your monthly expenses. This will identify you as a high credit risk and will actually reduce your credit score by 60 - 70 points overnight (Fair Isaac).

2. If you miss 1 or 2 payments on your credit card debt, the issuing company will skyrocket your interest rate to a whopping 27% - 30%!

3. Out of a random sample of 3 million American consumers (included in Experian's National Score Index), 51% of them have at least 2 credit cards and 14% of them have 10 or more credit cards.

Technique # 1: Lump Sum Payments

Before you call your creditor, be sure you’ve made out a list that includes your total monthly income and another list that includes all your set monthly expenses (rent/mortgage, utilities, minimum monthly payments, gas to get to work, groceries, etc). Once you subtract your expenses from your income amount, you’ll know how much money you have available to make a settlement with your creditor.

You’ll also want to read up on the Fair Credit Billing Act to make sure the creditor is dealing within the law. Lawless creditors can be sued in the courts if they violate this bill, so sometimes it pays to know what’s allowed. 

Video: How to Lower Your Debt

When you call your creditor, explain your situation and state your desire to pay back what you owe. Then tell them you can make a few lump sum payments to catch up. If you have a tax refund coming in, a bonus check from work or money borrowed from a family member, you will be in a better position to bargain for reduced debt. Remember that collection agencies, in particular, have purchased your debt for pennies on the dollar so you’re cutting into their profits by negotiating, not trying to skimp out of what you owe them. Aim for one-fourth or one-half of what you owe.

fighting to reduce debt

Typically if you can pay off the amount in one to four months, the creditor will go for it (the shorter the time span, the better). One successful tactic is to let the creditor throw out the first figure of what they want and work your way down from there. Also, if you can, try to call at the end of the month, since creditor commissions usually go by a monthly basis. You may have a much easier time when the creditor’s not as pressured to fill a quota.

Technique # 2: Fight Interest

As you know, interest can rack up the charges by thousands of dollars, escalating what you owe. You’d be wise to try to negotiate lower interest rates. If you’ve been a faithful customer who is always on-time, you may want to shop around for credit cards with lower interest rates, and then call your creditor to ask if they’d give you a comparable rate. You’d be surprised: often they cave to keep you as a customer.

If your problem is that you haven’t been a great customer, a reality which caused your interest to skyrocket, then you can try to become a better customer and reduce your own debt today. Your creditor may reduce your minimum monthly payment as you begin to pay off your debt, say from $80 down to $65. However, if you continue to pay off the higher minimum payment of $80 on a debt of $3,200 (with an interest rate of 14.9%), you will save $1,660 in interest and shorten the amount of time it takes to pay off your debt by more than 13 years!

Another interest reduction tactic for long-term debts is seen in mortgages. For example, say you have a $70,000 mortgage at 8% for 30 years. By paying just $50 more each month, you will pay your mortgage off 8 years sooner and save $35,000 in interest!

Technique #3: Sign Up For Credit Counseling

Credit counselors are great at negotiating lower, more reasonable payments for you. Enrolling in a Debt Management Plan can help you curb troublesome habits that made you get into debt in the first place, increase your savings and get a more manageable monthly payment. You may call your creditor and provide the name, address and phone number of your DMP officer to make life much more manageable.

There are other plans you can sign up for as well, including: debt settlement (where you charge off your accounts, paying less than what you owe), debt consolidation (where you pay all that you owe but at a lower interest rate) or bankruptcy (where you pay little to none of what you owe). For creditors, bankruptcy is the worst! So remember this as a bargaining chip if they get particularly nasty with you. The threat of bankruptcy stops them dead in their tracks, although in reality, you will want to find a better alternative for your own personal financial situation.

Mistakes to Avoid When Negotiating

One of the most common mistakes is to avoid calling a creditor entirely. Many consumers think if they ignore it, it’ll just go away. While many creditors won’t offer you a great deal if you’re paying on-time every month, it’s still not good to let more than a few months elapse without communication. If it seems like forever since you last paid on your debt, check with your state’s attorney general to see if the statute of limitation has passed. This time frame can range from 3-15 years depending where you live and you may not have to pay this creditor at all.

Never call a creditor without taking notes. You should record the date and time you called, in addition to the person’s name and ID number that you’re speaking with. Keep notes of what was said and ask for any settlement arrangements in writing before you make a payment. The ideal way to negotiate a new payment plan is actually in writing by mail if you can.

Video: Family Guy’s Brian Makes a False Repayment Promise

Avoid making promises to pay that you can’t keep. Even though a telephone conversation is hardly a legal agreement, you’ll lose most, if not all, of your bartering power later on. Try to avoid losing your temper, swearing or name-calling, as most calls are recorded.

reduce debtNever blindly agree to pay off a collection agency who phones you. Ask them for a “letter of validation” to prove that they are legally entitled to collect your debt. A number of scams came from fly-by-night agencies who had no right to collect a person’s debt or who tried to collect on a debt that had already been paid off. Remember, if they fail to respond to your inquiry within 30 days, they’re in violation of the law!

Terminology When Talking With Creditors

First, remember to ask for a “letter of validation” to prove your debt is legitimate. This will also buy you more time and prove that this vendor is legally allowed to seek payment from you.

Next let them know you would like to make a “settlement offer,” which means you will agree to pay a lower debt amount and your creditor will consider the debt forgiven.

Once a settlement offer is made, ask for a “payment settle agreement in writing.” You can keep this for your records so the creditor can’t dispute their verbal promises later. Do not ever feel pressured to send the creditor money immediately or overnight. By law, you are legally entitled to getting this payment agreement in writing before you send any money.

When paying your last payment, be sure to write on the check “This check constitutes payment in full.” Keep a photocopy for your records and send this by certified mail.

Also, you may ask that a “settlement letter” be sent when you’re finished paying off your debts, which will indicate that your debt has been adequately resolved as agreed. This is important to avoid disputes later or another collection agency trying to charge you again for this paid-off debt.

15 Common Creditors and Collectors:

If you’re not sure which creditors or collection agencies are hounding you, ask TransUnion for the names, addresses and telephone numbers of each creditor listed on your credit report. Otherwise, try one of the following:

Discover Card 1-800-347-2683
American Express 1-800-528-4800
Mastercard 1-800-622-7747
Visa 1-800-847-2911 
Allied National 800.456.5770
National Asset Management 1-877-299-6276
AmerAssist 1-877-294-9707
Pyramid Financial Solutions 1-888-298-1261
Payment America Systems 1-800-264-9200
Dun & Bradstreet Collection Services 1-800-234-3867
Vendor Seek 1-800-446-1073
National Collection Network 1-866-581-1107
Buyer Zone 1-888-393-5000
Jena Mae Inc. 1-866-307-0958
Professional Attorney Network 1-877-285-9929