9 Crucial Things to Know About Credit Card Modification

credit card modification

Are you drowning in credit card debt?

Maybe you’ve tried consolidating your credit card debt, but your credit score is too low to qualify. Perhaps you have too much to consolidate it all together.

Credit card modification might help in these situations, but it comes with serious risks. Here’s how it works.

1. What is credit card modification?

Beverly Harzog, a credit card expert and the author of The Debt Escape Plan, lumps credit card modification under the umbrella of debt settlement. The process of hiring a negotiator is similar, but the focus is on unsecured credit card debt.

With credit card modification programs, companies manage your debts for you. They get agreements from your creditors to let you pay less than you owe.

The results are similar to debt settlement negotiations. The negotiator works on your behalf to convince your creditor that you won’t be able to make all of your payments. Creditors then agree to settle for a smaller amount.

2. How does credit card modification work?

When you enroll in a credit card modification program, you stop making payments to your creditors. Instead, says Harzog, you make monthly payments to the company negotiating for you.

“These companies keep the money in an account,” Harzog explains. “As you make your monthly payments, the account grows. Down the road, when a creditor agrees, the money is used to pay the settled amount.”

Harzog says it can take six months or more for the first creditor to settle. After that, it might go faster. She also points out that once you enter a credit card into a program like this, you can’t use your credit account anymore — it’s considered closed.

3. What if creditors don’t agree?

Just because you enter debt settlement negotiations doesn’t mean that all your creditors will agree to the terms. “There are no guarantees in this type of business,” says Harzog.

A creditor may decide to sue you for the amount you owe after you stop making payments, Harzog points out. Depending on the credit card modification company you use, they might represent you in court in such a case.

If creditors don’t agree to settle your debt, the accounts that aren’t settled could be turned over to collections. At that point, you begin making payments to the collections company.

4. Credit card modification fees

When you hire a debt negotiator that agrees to represent you, there will be fees. The Federal Trade Commission prohibits debt settlement companies from collecting upfront fees for debt settlement. However, you can be charged fees after at least one debt has been successfully settled.

Additionally, many companies charge attorney fees. As Harzog notes, this is often a flat fee that’s rolled into your payment agreement with the debt settlement company, too.

On top of all that, you could end up with huge fees from your creditors. When you stop paying your credit card bill, those fees add up.

If the credit card modification is successful, those fees are taken care of in the settlement. But if a creditor refuses to settle, the fees are still part of your financial situation. Those extra charges could wipe out any savings you got from the settlement.

5. What does credit card modification do to your credit?

“Whether it’s credit card modification or debt settlement, your credit is going to take a hit up front,” Harzog points out. “You’re not making your payments, and that’s the biggest part of your credit score.”

However, Harzog continues, the impact starts to fade after a couple of years. “If you are in a tough spot, it’s a matter of priorities right now,” she says. “Get the debt taken care of and don’t worry about the credit score as much. You can rebuild your credit once the debt is gone.”

Plus, if you complete your credit card modification program, you might be able to get your creditors to mark your accounts “paid as agreed.”

Nonetheless, prepare for the consequences of poor credit. You likely won’t be able to get new loans, including credit cards. If you want to get a car loan or a mortgage in the next couple of years, says Harzog, credit card modification may not be for you.

6. Don’t forget about taxes

Harzog says one of the things many borrowers overlook is the tax impact of these programs. “No matter what it’s called, if it’s settled debt, it’s considered income to the IRS,” she warns. “Talk to a tax professional to work all that out.”

It’s important to plan for the possibility that some of the principal, interest, and fees that you end up not paying as the result of debt settlement negotiations could be taxable.

Your debt settlement amount could mean added income in the eyes of the IRS, bumping you into a higher tax bracket and making your tax bill unmanageable. As a result, you could wind up with a payment plan to the IRS once your debts are taken care of.

7. Watch out for scams

While there are legitimate credit card modification programs, Harzog points out that there are plenty of scams as well.

“If you decide this is the route you need to take, the number one thing is to be sure you go with a reputable organization,” Harzog says. She recommends that you start with the National Foundation for Credit Counseling (NFCC).

The NFCC offers the resources you need to get your debt under control and can walk you through possible options for your situation. Harzog says choosing companies and counselors that are NFCC-certified reduces the chances of being scammed.

The company you choose should also be transparent with their fees. Most debt negotiation companies charge fees, but they are often collected on a monthly basis, wrapped up as part of your program.

Harzog advises people to beware of companies that guarantee a settlement or modification program. Creditors can choose not to settle, and no negotiator can deliver a 100% success rate.

8. Can you do it yourself?

Before you decide to pay someone else to negotiate with your creditors, Harzog suggests trying yourself. “Contact the credit card issuer yourself,” she says. “They have hardship departments and can maybe help you.”

As long as your account isn’t in collections, she adds, many creditors will work with you on a modified payment plan. You might still have to close the account, but at least you won’t pay extra fees.

However, creditors’ hardship programs might not work as a long-term solution, Harzog says. If you think it will take more than a year to sort out your problems, that option may not be ideal.

9. Who should consider credit card modification?

In the end, Harzog says, these types of programs can be helpful to consumers overwhelmed with debt and verging on insolvency. However, she advises they be used as last resorts.

Before you turn to credit card modification or debt settlement, try other avenues first:

In some cases, Harzog acknowledges, you just can’t get there on their own. If your payments and interest are sucking up too much of your income and you aren’t eligible for other programs, credit card modification programs and debt settlement can be last-ditch efforts.

“If you really don’t see any way out,” Harzog says, “this can be the option you try just before bankruptcy.”

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1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with Citizens Bank at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, Citizens Bank checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
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