07/28/2011 11:15 am ET | Updated Sep 27, 2011

How To Reduce Credit Card Interest to Zero Percent With No Effect on Your Credit Rating

Several of the big banks will now take the initiative after you miss two payments in a row, and offer either a short payoff deal or severely reduced interest rate. You don't have to call them; they send the offer to you.

This is not guaranteed. Your particular bank could change policy tomorrow without rhyme or reason, in which you'll have a couple of months of missed payments on your credit record, and of course be angry with me. (A few months later you may feel grateful. Please read on.)

However, it's a consistent pattern from big banks since mid-2010: miss a couple of payments in a row, and suddenly Big Bank is sending you offers to cut a deal for a short payoff, or a low/zero percent interest deal. Here is a sample letter containing both types of offer:


(Image is a graphic composite created from major bank settlement offers; there is no major bank named BCBD. The numbers are exact figures from a major bank offer to a consumer.)

Not bad for starters, an offer to settle for 55 cents on the dollar, dated June 2011. Or alternatively, payments at zero percent interest. The next month's deal was even sweeter, down to 45 cents on the dollar only 29 days later. Why not? If they sell it to a debt collector they'll get 3 cents on the dollar.

But ... wait! The bank pitched the short payoff offer before the zero percent interest offer for a reason: they know something you don't.

They know that, statistically, you are likely to sooner or later stop paying the credit card bill -- even at zero percent interest. The car will break down, or your kid will have a skateboard accident, and suddenly even monthly payments with no interest will be more than you can afford. Maybe it won't happen to you -- but it will happen to most people who have missed two payments in a row.

At that point the bank will be feeling pretty good, having snagged a few thousand dollars instead of selling it to a debt collector for pennies on the dollar. You, on the other hand, will be feeling pretty bad, wondering why it seemed like a good idea to mail them several thousand dollars that you now need. In the case above, you would be wondering why you had mailed them $3,917.00... which may soon look like real money.

I strongly recommend the zero percent offer over the short payoff for any reader who is not absolutely confident that their financial troubles are behind them. The logic is pretty simple: if you can't afford the monthly payments at zero percent, you can always stop paying again, at which point you will probably have the option of a short payoff -- or to simply stop paying altogether.

If you take a short payoff, however, that money is gone, gone, gone. In my experience the only people who should be taking short payoffs are the rich, and well-paid yuppies who are conveniently blowing off their Neiman-Marcus charges. Short payoffs are not for people who are running lean on cash.

The logic is even simpler if you're concerned with your credit rating: a short payoff will probably ding your credit record, unless you have it in ironclad writing from the bank that they will report a normal full payoff rather than a short payoff.

Reduced interest is different, because that's a change made by the bank to an ongoing relationship. It might ding your credit a little, but probably won't show up as a clear negative mark at all.

If you take the short payoff offer, there usually is not much discussion. You call and tell them you're taking the deal. If they get nosy: you're unemployed and you're broke, but your father/mother/son/daughter might be willing to lend you the money.

Remember: you don't have the money... but might be able to borrow it. That you're laid off and living off unemployment benefits, that you have medical expenses -- they don't care. If you have the money, they want it. Your having to borrow the money to pay them is what puts them in a hard spot, because they have no way to trick, bully, or guilt the person who might lend you the money.

The zero percent interest deal may involve more questions from the bank, because they want to know if you can keep paying. You can take a lot of the wind out of their sails by telling them right up front that "I'm broke, otherwise I would have taken the short payoff offer."

Choosing the zero percent interest deal can lead into a lengthy interrogation -- if you let this happen -- about your rent, utilities, and car payments. This goes nowhere good for you, since a zero percent interest offer can only change in one direction: upwards, to 5 percent, 10 percent, or more. I recommend ignoring the questions and returning to the key points: you're broke, and you have no income.

Your position is similar to #1 above: you don't have the money, and you're broke and unemployed -- but your mother, father, son, or daughter is willing to pay your monthly bill.

The bank agent may posture and push, but at this point they're out of luck and they know it. You're in the driver's seat -- because if you hang up, they get $0.