Editorial Policy

How to get out of paying high interest charges

Erica Sandberg

By
February 6, 2015

QHi Erica,

Is there a way to remove the interest from my Discovery bill? It is way more than I ever put on the card, and I have been paying for over two years, so they have got more than what I spent with it. I have heard that people can do this. What do I have to do? –Marvin

ADear Marvin,

Though you don't specifically say, what you seem to be seeking is a settlement. These deals can be fantastic for people who have large outstanding balances they can't (or don't wish to) pay in full, as long as the creditor is willing to accept less than the actual debt.Ask Erica

You may have already satisfied the principal of what you borrowed from your credit card company plus a whole lot more, so it does sound logical that they'd be happy to shave off the remaining finance charges and call it a day. Unfortunately, that's not the way most of these arrangements work.

When you applied for and then received the Discover credit card, you committed to the terms of the contract, which included paying the finance fees applied to unpaid balances. You had a choice, too. Had you paid for everything you bought by the billing due date, you would have enjoyed a free short-term loan. When you paid less and rolled the remainder to the following month instead, interest was applied to the balance. Each month that you extended the debt resulted in more being added to the total. Fees rack up fast, since interest compounds: It's not just calculated on the amount you charged, but on the amount they've already added in.

How expensive can all this get? Extremely! For example, if you charged $5,000 on a card with an annual percent rate (APR) of 21 percent, and only sent the minimum requested payments, it would take 16 years and cost over $6,000 in finance fees to pay off.

Your question, though, is would the issuer accept less than what you owe today because you have already repaid what you borrowed (the rest being those built-up fees). And the answer is unlikely, but you've got nothing to lose by giving it a try. Asking never hurts.

Contact Discover and speak with a manager. If you can provide a great reason as to why you need a break on the balance, it is possible they'll waive some fees. Just don't count on it. Unless you have no way to cover even the minimum payment, a card issuer has no real incentive — and certainly not any legal reason — to reduce the balance.

The vast majority of debt settlements are arranged with collection agencies, not original creditors. Card issuers will usually take one of two types of action after an account is six months' delinquent. They will either sue for the money owed (and try to get you to pay via a court judgment) or write it off as a bad debt. If the issuer sells the account to a third-party collector for a fraction of its value, it will  recoup at least some of what's owed to it.

To a collection agency, accepting a settlement can make economic sense. For example, it may buy an account worth $5,000 for $2,500, then attempt to collect on the entire $5,000. You may not be able to afford that, but can send $3,500. The agency would still earn $1,000 and not have to waste resources contacting you again, so it may agree. Yet if it thinks it can get more out of you, it won't negotiate. The older a debt becomes, the more a collector may be willing to negotiate.

But does allowing the debt to go into collections make sense for you? Probably not, as  even a fantastic deal can be tempered by the IRS. Forgiven sums of over $600 will result in the creditor issuing a Form 1099-C, or cancellation of debt, to you. Essentially, it's considered income, so you may have to pay taxes on that portion.

Also, know that settled debt will be reflected on your credit reports at the three major credit bureaus for seven years, ultimately impacting your FICO score, the dominant scoring model. Lenders will see that you did not pay the bill in full or if you were delinquent, and that can affect your ability to borrow, get good cards or get good lending terms. (As an aside: It's always good practice to check your credit reports at least once a year for free at AnnualCreditReport.com. You can check your credit score for about $20 at MyFICO.com.)

But there is another option: Pay off the debt as quickly as possible. You might try selling unneeded items. Look around your house for things that might be of value to other people, but you no longer care for. Or, take on a second job. It doesn't have to be boring or low-paying. You can serve in opinion groups for market research companies at about $100 an hour, for example.

I also urge you to go to credit counseling. These nonprofit organizations can help you set up a livable budget and offer excellent advice tailored to your situation. A debt management plan may be offered, which is a way for stressed-out borrowers to repay their credit card balances with lowered interest rates and sometimes smaller monthly payments. You'd protect your credit rating this way, too

In the future, you can prevent having to pay finance charges on credit cards by sending the full balance by the due date. If you don't, you'll just have to accept that the issuer will charge you extra for the privilege of extending the loan.

Got a question for Erica? Send her an email.