In partnership with a major consumer credit counseling accrediting agency, 10 of the nation’s largest credit card issuers have agreed to provide additional relief to consumers struggling to repay their debts.
That change was announced today by the National Foundation for Credit Counseling, a major nonprofit consumer credit counseling group. In fall of 2008, the NFCC issued a “Call to Action,” asking creditors to make changes that would lower the cost of consumer participation in debt management plans, or DMPs — programs administered by accredited consumer credit counseling agencies to help families drowning in debt work out reasonable long-term repayment plans with creditors.
The 10 issuers supporting the “Call to Action” are American Express, Bank of America, Capital One, Chase Card Services, Citi, Discover Financial Services, GE Money, HSBC Card Services, U.S. Bank and Wells Fargo Card Services. Of the top 10 issuers, only USAA is not included. (Although USAA is a top 10 issuer by market share , it was left off the list because it is not a top 10 creditor for NFCC member agencies.)
Essentially, the plan creates a second tier of debt management plans for people in particular distress, allowing them a lower repayment rate.
According to the NFCC release, “For more than 40 years, consumers have avoided bankruptcy and benefited from repayment programs commonly referred to as ‘debt management plans’ (DMPs) through which creditors provided some repayment concessions, including waiving late and over-the-limit fees and a reduction in interest rates. However, in these tough economic times, fewer consumers have sufficient income to be eligible for, or the ability to maintain, a traditional DMP, often leaving bankruptcy as the only option.”
What the changes would mean
Ten of the largest credit card issuers have agreed to adjust their “debt management plans” that allow struggling consumers to get structured repayment plans. The chages include:
- “Hardship” cardholders — those who are dealing with a recent job loss or other especially challenging circumstance — would owe a minimum 1.75 percent repayment rate.
- Other consumers would have a monthly minimum repayment rate of 2 percent of their balance. Under existing DMPs, that rate can reach as high as 3 percent.
- This means that a hardship consumer with $20,000 in debt would face a minimum payment of just $350 instead of one as high as $600, while the minimum payment for other consumers would be $400.
- Some level of savings would be encouraged, not discouraged.
That number appears to be growing. Overall, delinquencies are continuing to rise, and major issuers are choosing to charge off more and more of their holdings. For example, Capital One said its net charge-off rate for U.S. card holders — the percentage of loans that the issuer has given up on collecting — rose to 9.33 percent in March, up by 1.27 percentage points from February.
When it comes to struggling borrowers, the plan “makes the repayment of the debt more affordable and more relative to today’s reality of what consumers are struggling with,” says Gail Cunningham, senior director of public relations for the NFCC.
Under the new system, “hardship” cardholders — those who are dealing with a recent job loss or other especially challenging circumstance — would owe a minimum 1.75 percent repayment rate, while other consumers would have a monthly minimum repayment rate of 2 percent of their balance. Under existing DMPs, that rate can reach as high as 3 percent, Cunningham says. That means that a hardship consumer with $20,000 in debt would face a minimum payment of just $350 instead of one as high as $600.
This isn’t the first attempt to encourage consumer enrollment in DMPs. In October 2008, banking industry representatives and consumer advocates introduced a proposal that would have enabled creditors to forgive up to 40 percent of the principal on credit card loans and stretch repayment plans over five years. However, the Office of the Comptroller of the Currency (OCC) ended up rejecting the plan in November.
The new, tiered DMPs offers benefits to both consumers and lenders, the NFCC says. The new program would enable tens of thousands of borrowers to join a DMP, adding $677 million of unsecured debt to new DMPs each year, according to NFCC’s Cunningham. Furthermore, $135 million would be returned to creditors annually, she says.
In addition to helping borrowers erase their debt, the new DMP plan also encourages them to set aside funds for a financial safety net. “We’ve plugged in several of the basic building blocks of financial stability under this plan,” Cunningham says. In the past, debt management plans demanded every spare dollar be applied to paying off debt. Allowing people to build some emergency savings would prevent them from falling back into debt easily.
Think you could use help from a DMP? For borrowers dealing with their own personal debt woes and interested in finding a DMP, the NFCC recommends dialing (800) 388-2227 to get connected with a local agency.
“We anticipate that our phones lines will be flooded once the message gets out there because people are going to wonder, ‘Does this apply to me?'” Cunningham says.