Reduced Payment Plans Not Offered by all Credit Card Issuers

Dear To Her Credit,

I have been in financial hardship for a couple of years now. It started with divorce, spousal support, child support, lawyer fees and a small-time business that I got myself into, but did not succeed. All these led to credit card debts. Everything was getting charged to my credit cards.

I currently owe about $43,000. The last thing I want is to file for bankruptcy. I have a full-time job and earn a decent amount of money, just not enough to pay all my bills.

As advised, I called Chase, Citi and Macy's for a temporary reduced payment arrangement. They were all willing to help and put me on a monthly payment plan for a year that is affordable to me. I closed all three accounts, which has helped reduce my monthly bills. I have been living on debit cards and cash for a few months now. It has been a struggle, but I am happy that I was able to survive without charging anything. I cut down on a lot of things.

The last credit card that I have is with Bank of America. I cannot believe that this bank will not work with me on a temporary payment plan. I requested the bank to close my credit card, which it did, but I was unable to get them to help me with a reduced payment plan. Why were Chase, Citi and Macy's able to help me and not BofA? Can they deny me like that? I am an excellent customer (except that now, I am in desperate financial difficulty). I never remember myself ever paying late on any of my credit cards. I went on a payment plan because I know I owe the money and have the best intentions to pay back every penny. Will you advise on what my next step should be?   

- Midea

Dear Midea,

A credit card company is never obligated to work with you on a payment plan. They will only do so when they think it is in their best interest. Deborah McNaughton, president of Professional Credit Counselors in Placentia, Calif., says, "Usually they will do this if an account is delinquent or the customer is showing a financial hardship.  The more delinquent an account is, the more they are willing to work out a settlement."

The way to talk a credit card company into letting you pay less on your account, then, is to convince them that doing so is in their best interest. As long as you keep up with the payments, they'd rather just keep it that way.

Some credit counselors would tell you to purposely pay less than the contractual minimum amount or stop paying altogether, to let the bank know you are serious. I think that tactic should be a last resort, for a couple of reasons.

First, paying less than minimum makes no sense. Minimum payments on credit card balances are so low that it can take decades to pay them off. Imagine how long it takes if you pay less than the minimum! You don't need lower payments nearly as desperately as you need lower interest expenses!

Second, purposely letting your account slide so you can persuade the bank to put you on a reduced payment plan is going to cost you. You'll get late fees. Your interest rate will go up. High interest rates on the balance including late fees will turn into an even higher balance -- and perhaps over limit fees. Your credit score will dive, making it harder for you to get reasonably priced credit. Things get rapidly worse.

A better plan is to find a way to make your minimum payments, and then pay off your debt as quickly as possible. That may sound impossible right now while you are struggling, but consider the possibilities.

If you owe about $10,000 on your Bank of America card at an 18% interest rate, your minimum payment is probably about $250 per month. Unfortunately, over half of that payment is going to interest. You're swimming against the interest expense riptide.

You need to transfer the amount you owe to a lower interest rate, start making bigger payments or both. Do you have something you can sell -- a car, investments or miscellaneous things in a garage sale? Can you borrow from yourself from another account? Do you have a parent who can afford to lend you money at a lower rate of interest? (If you pay them more than they are getting at the bank, you can both win.)

If you still have a good credit score, perhaps you can find a balance transfer credit card with a lower interest rate. But beware, transferring to an account with a lower introductory rate is seldom free, and you must immediately start lowering the balance to win that game! See "Too many credit card balance transfers can be a bad idea."

Perhaps you can make an extra few hundred dollars a month. You make a "decent" salary; you must have valuable skills. Can you use those skills for moonlighting? Many people make a few hundred dollars doing anything from designing websites to waiting tables.

You also have experience in small business. Never mind that the first try didn't succeed. Look at how much you learned! You could try it again with something that uses time and your skills, but little or no cash investment.

If you can both lower your monthly interest expense and start paying even the smallest amount more, you'll start seeing more of your money going to pay off the balance instead of just going to interest and fees. You should soon feel like you're swimming with the tide -- instead of against it. You've come this far, keep up the good work and take care of your credit!