The Smartest Way to Miss a Credit Card Payment

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There are effective ways and not-so-effective ways to deal with missing a credit-card payment.

Chris Luder used a credit card for years without problems, but then he hit hard times in 2006. He needed tongue surgery that cost him close to $2,000. He had to pay another $1,000 or so when his truck suffered two hit-and-run accidents in one month. Luder, a graphic designer in Houston who was in his mid-twenties at the time, hadn't had a chance to amass the savings to deal with such misfortunes. He ended up turning to credit card companies for help.

They weren't his friends. In October 2006 Luder was late making a payment on a credit card from JPMorgan Chase(JPM), and the New York firm jacked his rate up to 29% from 6%. When Luder called Chase to say he wanted to repay the $2,500 he owed but he didn't know how, he says he got little help. "It's this automated service or a guy in the basement, and he's like, 'we don't negotiate rates,'" Luder says. "They didn't care."

Chase Card Services spokesman Paul Hartwick says his firm's details of this matter are "inconsistent" with those given by Luder, but he declined to provide specifics about the case, citing privacy concerns. Chase advisers have tools they can use in certain cases, including the ability to reduce a card member's interest rate. The bank can also waive its customers' late or over-limit fees, and design payment programs to help them through stressful periods. "We always welcome the opportunity to talk with our customers," Hartwick adds.

Increasing numbers of cardholders are in need of such chats these days, and that's hurting bank profits. Many lenders have been trotting out grim news in recent weeks.

To name only a couple of examples, the Charlotte, N.C.-based heavyweight Bank of America(BAC) on Jan. 22 more than doubled its provision for overall credit losses from a year ago, to $3.31 billion, and said its managed credit card net losses during the three months ended Dec. 31 swelled to $2.14 billion from $1.91 billion in the same period the previous year.

The McLean, Va.-based credit card company Capital One Financial(COF) said on Jan. 23 that its income from continuing operations sank 20.1% from the prior year to $321.6 million during the fourth quarter, and fell 42% year over year to $226.6 million, including a loss related to the shutdown of its unit GreenPoint Mortgage.

"Before the subprime lending crisis, the banks didn't have to bow and scrape for your business, but now they desperately need you," says Robert D. Manning, author of the book Credit Card Nation. "If you have a substantial debt load, they don't want to lose you" because someone with a big debt load is often profitable for the banks.

In other words, when you're facing an impossible credit card payment, you might have more bargaining power now on how to avoid missing it. In any event, you have reason to fight. Scott Bilker, the founder of DebtSmart.com, says your lender might raise your rate to as much as 32% if you miss a payment. If you were regularly paying off $140 per month on $5,000 of credit card debt at an original 10% rate that got jacked up to 32%, you could end up owing an extra $10,220 as a result.

But Linda Sherry, the director of national priorities for the nonprofit Consumer Action, cautions that people should be careful about discussing finances with the card companies. "If you believe you won't make the payment, you should call and talk [to the creditor], but it's a double-edged sword," Sherry says, explaining that companies use risk-based pricing and might end up seeing your phone call as an opportunity to hike your rates. "Do you really want them to know you're in trouble before you've figured out that you can't solve the problem any other way?" Sherry asks.

If you're sure to miss otherwise, you have nothing to lose by picking up the phone. When begging a customer service representative for mercy, it might help to invoke the laws on your side. "The Truth and Lending Act encourages banks to help people in financial difficulties with their loans and credit cards," Sherry says. "It's not pointed, but it's there." You can read it here to get ideas for arguments to pose. Another law that might help is the Fair Credit Billing Act, which you can read here.

Your odds of success at negotiating for a break will depend on your situation. For free, nonlegal advice from Consumer Action on how to best cope with your specific case, describe your problem in a voicemail message at (415) 777-9635 or (213) 624-8327. They'll research the matter according to the laws of the state in which you live.

You're not done even if you manage to win a concession. Jerrold Mundis, the author of How to Get Out of Debt, Stay Out of Debt, and Live Prosperously, recommends getting all promises in writing. "Odds are, 50% of the time you'll make an agreement that gets lost in the chain of notation," Mundis warns. "You'll think everything is fine and then, suddenly, you get a past due notice."

Luder ended up solving his debt problems by contacting the credit counseling agency Auriton Solutions and setting up a debt payment program in January 2007. After forking over around $450 per month for about a year, he has managed to reduce his rates to around 8%. His credit cards are inactive so he doesn't keep them in his wallet anymore. "They say you shouldn't deal in cash so much because it doesn't leave a paper trail, but cash is cash," Luder says. "If I have it, I have it and if I don't, I don't. The credit just starts piling up."

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