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How to haggle to reduce your credit card debt and rates

You can negotiate yourself or turn to an accredited credit counseling agency

By Gary Foreman

The New Frugal You
New Frugal You columnist Gary Foreman
Gary Foreman is a former financial planner who currently edits The Dollar Stretcher website and newsletters. He writes "New Frugal You," a weekly Q&A column about frugal living, for CreditCards.com

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Question for the CreditCards.com expert

Dear New Frugal You,
What's the best way to haggle over debts and get out for paying only half or even a third? I've never been able to accomplish this feat but would love to try. -- Wanda B. Haggler

Answer for the CreditCards.com expert

Dear Ms. Haggler,
You have a lot of company. According to a Sept. 1 Fitch Ratings report, 3.76 percent of credit card debt was 60 days or more delinquent. When you consider that Americans owe well over $800 billion in revolving debt, nearly all of it on credit cards, that's a lot of debt that people are struggling to pay.

No doubt you've seen or heard the ads touting that with one phone call, you can cut your debts by up to two-thirds. The soothing voice makes it sound painless. And, in some ways, it is.

You call a credit counselor on an 800 number. Choose one that's either a member of the National Foundation for Credit Counseling or Association of Independent Consumer Credit Counseling Agencies. The counselor will ask about all your debts. In many cases, they can work out a deal (known as a debt management plan, or DMP) that will lower the interest rate on your credit card balance and reduce the monthly payment.

Typically they'll consolidate all your payments. You'll send your check to them and they'll pay your creditors. Fairly clean and easy.

But there is a cost. Your credit report will show that you're "On Payment Plan" for those accounts. The result will be a lower credit score than if you were "current" or "paid as agreed" on them.

For the most part, these credit counselors work best for people who have more than $10,000 in credit card debt and who are beginning to fall behind in making their minimum monthly payments.

If you're having payment trouble each month, a DMP could be the best option for you. Having an account listed as "On Payment Plan" is better than being marked as "30 Days Late" or worse.

But, if you are able to make the minimum monthly payment and have a decent credit score, you have other, better options available.

Wouldn't you rather pay only half of your debts without needing to haggle at all? There are two ways to significantly reduce the amount you'll pay to settle your debts that require no discussion with the lender.

The first method is to transfer your credit card balances to a lower interest rate card. Suppose you owed $10,000 on your credit card. If you reduced the interest by just 3 percent (say from 17 percent to 14 percent), you'd reduce the amount of interest you'd pay from $22,190 to $12,887. That's a savings of about $9,300!

And, you don't need to haggle with anyone. Just transfer your balance to a lower rate card. Evaluate whether a transfer is right for you -- there are hefty balance transfer fees these days -- using our balance transfer calculator.

There's another way to cut your debt more quickly: Pay more than the minimum amount each month. This one is just a little harder because it requires you to find some extra money each month to put toward your debt.

Let's see how it works. Take a $10,000 credit card debt at 17 percent interest. If your monthly minimum payment is calculated by one common method -- all interest due plus 1 percent of the principal -- your minimum payment would be $242 today. Each month it would decrease a bit until the debt was completely repaid. Making minimum payments, you'd pay $13,794 in interest and be writing checks for a mind-boggling 380 months (that's more than 31 years!).

But, look what happens if instead of paying the minimum, you add to the $242 and pay $267 each month. You'll reduce the amount of interest paid to just $4,355. That's a savings of more than $9,000! Plus, you'll finish paying it off in less than five years!  Plug your own numbers into our minimum payment calculator to see how your own numbers stack up, and how much you can save by holding the payment steady, at an amount higher than the minimum.

So getting your debt reduced isn't as hard as you might have thought. And, if you're able to do it without the help of a credit counselor, you'll likely improve your credit score, too!

See related: Credit card payoff strategies, Compare balance transfer credit cards, Balance transfer calculatorTips and advice for balance transfers

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Published: September 30, 2010


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