What happens when your credit card company is willing to negotiate with you, but you don’t like the deal they are offering?

One of our readers, Damon, sent us this question:

Mr. Credit Card,

I have three credit cards with high balances and high minimum monthly payments, but I have never been reported late on any credit account I have had. I recently got behind on one of my credit cards, and I am trying to do whatever will hurt my credit the least, and to avoid any late marks on my credit.

The collection agency offered me a payment plan until the end of the
year, during which time my interest rate would be 1%. They further informed me that my account would be closed, and that once it is paid I could request that it be reopened.

I could of course just say not and try to make the past due payment and get it current, but I don’t know if that would ultimately be better for my credit.

Lastly, I have closed a couple accounts years ago, but that was after paying the entire balances in full, which I did not know at the time was not good for your credit score.

Thanks for your question Damon.

It’s wonderful that your credit card company is willing to work with you. Let’s take a look at your situation.

You have three cards with high balances, and the minimum payments are getting difficult for you to make.

There is no graceful way to say it, but this is one of those situations where you may have to choose between your overall financial picture, and your credit score.

There are a few very smart financial moves that will damage your credit score (though not irreparably). Closing credit accounts is one of them. Since I don’t have your complete financial picture, let me ask you some questions that can help you decide. If you take the time to sit down and work through these questions, you will know whether or not you need to accept the collection officer’s offer.

1. How much total debt do you have?
2. How much money do you have to apply to your debts each month?
3. Can you raise your income temporarily (like through a second job) or something on the side?
4. Can you cut back on your monthly budget so that you have more money to pay on your debt?

Now I know these are basic questions, but they are important. The problem with barely being able to make those monthly payments is that you are always one month away from disaster. Not only that, but you will never be able to pay your debt off if you are only making the minimum payments.

It makes sense to be worried about your credit rating, but that’s kind of like going to your cabin on the titanic instead of finding out where the life boats are. You might be comfortable in there, but you’re still going to sink.

Make sure that you have a written plan for repaying your debt – focus on that instead of your credit rating. Your credit rating itself is very resilient, if you close this account, and keep the other two open, your credit score will recover.

If you make your payments on time each month then your credit has already recovered from those accounts you closed out several years ago. It’s actually a very forgiving system. So much so that it makes more sense to do what is right for yourself financially than to pay more just too keep your score up.

In fact, I can honestly tell you that your debt to credit ratio (how much you owe on those cards / how close to your limit you are) makes up the bulk of your credit score. So even if you close that account, as long as you get the balances on those cards down as fast as possible your credit score will go up – far up – because of it.

My best advice is to do this:

1. Purchase a credit monitoring service - they run about $15 a month. You can compare the services from all three of the credit bureaus until you find one that suits you. I recommend Equifax ID Patrol personally. (If you visit that link click “protect my identity”).

   Just make sure that whatever you buy includes a credit score. This will greatly relieve your fears because you will be able to check and see exactly what your credit score is doing each month. Yes your score will go down if you take advantage of the repayment offer. Your score will also go up quickly as you begin to pay off your cards. If you monitor your credit score you will be able to see that happen.

2. Work out a new debt repayment budget, and pay as much above the minimum payments as you can each month.
3. Go ahead and accept the collection rep’s offer. 1% interest is excellent. If you pay as much as you can and have very little being charged in interest each month you will save money, and be able to pay your debt off faster.
4. Once you have the card paid off, you can open it back up - If it takes you several years to pay back your debt, I would not be surprised if you qualify for a much better offer than that card once it’s all said and done.

Now again, that is just my opinion. I place your financial well-being above your credit score.

If you want to move forward and leave the account open, you can certainly do that too. If you choose to do that, follow these steps instead.

1. Make a “catch up” payment - Do whatever you need to do to get current on your payments.
2. Ask a manager to remove the late fee for you - No sense paying on it if they are willing to remove it.
3. Pay your debt down as fast as you can - The only real reason to close your account was to take advantage of the 1% interest rate. If you are comfortable with your current interest rate, just keep your accounts paid up and send in extra payments as often as you can.
4. Periodically check your credit score, but don’t buy a subscription - If you are keeping your accounts open your credit score will not take a hit. I would say, check every 4-6 months as you pay your debt down.
5. If you do not close out your account, you can also consider transferring the balance on one of more of your cards to a new card with a better interest rate. (Check our our best balance transfer credit card reviews). Consolidation loans might be another options as well.

It’s a really good question, Damon, thanks for asking. The right answer for you might not be the right answer for someone else. Only a close look at your own financial picture will give you that answer.

In conclusion – I’m not saying that your credit score doesn’t matter, it matters very much. In this situation though, I believe that whichever path gets you out of debt the fastest is the best course to take. Your credit score will recover as you pay down the balances on your credit cards.

Thanks for your question!

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Grab our Free RSS Feed and Keep Reading:

• The FICO® Score Breakdown - Damon, check this article out to see how your credit score is computed.
• What Is The Difference Between Debt Consolidation and Credit Counseling?
• How to Reduce Credit Card Debt?

This entry was posted on Monday, January 26th, 2009 at 15:18 and is filed under Debt Reduction FAQ. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.