Let’s talk about a man named Jerry. He’s been consistently paying his credit card bills for 6 years and has always been on time. He’s an IT professional, works for a major brand name in the United States, and makes $85,000 per year. At least he did… until he got laid off three months ago.
He’s been trying to find work, but the unemployment checks have come in yet and the credit card bill is 90 days past due. What can Jerry do? He can call up his lender to create a workout agreement.
A credit card workout agreement is a fancy term for a payment arrangement. It’s a way for the credit card lender to keep an account being marked as current while Jerry makes payments based on what he was able to negotiate. As long as Jerry keeps up with those payments, he won’t be charged late fees, even if he can’t pay the regular minimum amount due.
Why Are Workout Agreements So Important?
It’s one of the most effective ways to manage credit card debt when there isn’t enough money to go around to pay all of the bills. By being able to reduce payments by a certain amount for a specific period of time, consumers are able to maintain their good credit profile even when times aren’t so good. It’s more effective than credit balance insurance because no payment is required and can be negotiated at any point in time.
A secondary benefit of a workout agreement is that it may stop a penalty APR from being enforced on an outstanding balance. In Jerry’s case, this might not be true because he waited for 90 days before contacting his lender. A penalty rate can be applied at the 60 day mark. If you’ve already missed one payment and think you might miss another, then contact your credit card lender immediately to discuss the possibility of a workout agreement.
Missing a payment on a workout agreement is just as detrimental as missing a minimum amount due every month. If you don’t make your payments as agreed, penalties and late fees can be applied to your account.
What Is the Danger of a Workout Agreement?
Although workout agreements can help someone manage their debt, it will often close off their credit card from new purchases. Some lenders may even choose to close an account as part of the deal to have a workout agreement implemented. This can affect a consumer’s credit score in a negative way, especially if the closed credit card is the oldest account that a consumer has.
The second danger is that a credit card lender may agree to a workout arrangement where a portion of the debt is forgiven in exchange for a certain amount of payments. The amount forgiven is considered to be direct income receive in the taxing year that it happens. A consumer who receives a $3,000 forgiveness in 2015 would have to report an additional $3,000 of income for their 2015 taxes.
By knowing what a workout agreement is, you can be a little more proactive about your finances than Jerry was, even when times get unexpectedly tough. Even if you think you might miss one payment, contact your lender and talk about a workout agreement. It’s the best way to maintain your good credit score in bad times.