Creditors become less willing to negotiate with debtors
Card issuers scale back offers to cuts rates in debt management plans
Credit counseling agencies could once negotiate lower interest rates on behalf of debt-ridden clients. But credit card issuers are no longer willing to be as forgiving, adding more pressure to some already over-stretched borrowers.
Some major credit card issuers are reluctant to lower their interest rates at all, while others are making it more difficult for debtors to enter into the sort of repayment plan that they once embraced. A few card issuers are also less forgiving when a consumer misses a payment. Concessions come solely at the discretion of card issuers, which may raise or lower rates arbitrarily. "It's tougher for us to get any negotiated resolution that works better for our clients," says Joel Greenberg, the founder and president of Freehold, N.J.-based credit counseling agency Novadebt and chairman of the Association of Independent Consumer Credit Counseling Agencies (AICCCA), a national trade organization of counseling agencies. "A lot of people are faced with limitations as to what can be done to help them."
"In the vast majority of instances, we can't negotiate anymore," says Natalie Lohrenz, counseling administrator of Consumer Credit Counseling Service of Orange County, Calif. Credit counselors do the bulk of the negotiating with lenders, installing debtors in "debt management plans." The counselors act as the middleman, collecting money from debtors and parceling it out to lenders as specified in the plan.
Financial pressure on both sides
When card issuers won't lower their interest rates, borrowers' debt mounts.
The result, say a number of credit counselors, trade organizations and experts who follow the credit card industry, will be more personal bankruptcies -- with all the economic and social repercussions of widespread financial troubles. Critics say card issuers should be more willing to help their customers avoid bankruptcy. "We're in a major economic downturn that's put more pressure on the consumer," says Orange County's Lohrenz.
This is happening at least in part because banks, too, are under more financial pressure in the current difficult economy -- and they're loathe to accept less money from their loans.
Columbia University law professor Ronald Mann says credit card companies have determined that "it's not profitable anymore as much as it was to give big write-downs.
"Credit card companies are out to make money," Mann says. "Just because companies gave write-downs for years doesn't mean they should keep doing it." He adds: "The companies can calculate what works for them. They have become more sophisticated over the last 10 years."
Some in the credit card and banking industry say present policies are fair and consumer friendly, offering some limited options to help struggling consumers, even if those options aren't as generous as in the past. They believe that card issuers are confident that most borrowers will pay their debts even if card companies don't lower their rates. A spokesman for the American Bankers Association says these companies must weigh the concerns of cardholders and their organizations' own needs. "Banks make every effort to help their customers meet their.obligations," says Peter Garuccio, director, ABA public relations. "Every case is different, and from a business perspective, banks must balance the desire to work with troubled borrowers against the need to protect the interest of their shareholders."
Still, consumer advocates say card companies made it too easy for high-risk customers to sign up for their products and now owe these borrowers relief. The card issuers say they are under no such obligation.
-- Travis Plunkett,
Consumer Federation spokesman
Growth in credit card debt
Over the past two decades, credit card debt has approximately quadrupled, estimates the Consumer Federation of America, a Washington D.C.-based research and consumer advocacy group. "As financial stress increases, credit card debt can be the straw that breaks the camel's back," says Plunkett. "In the worst of times, bankruptcies can destabilize the economy."
The American Bankers Association puts more faith in a 2004 Federal Reserve report that says card balances, while rising, are at far more benign levels. It says that 46 percent of American households carry a credit card balance, and the report pegs the median household credit card debt at $2,200.
Frustrated credit counselors say they could once depend on credit card issuers' flexibility. They regularly worked out interest rate reductions to lower than 10 percent -- and as low as 0 percent -- and debt payments to 1 percent or less of the total owed. Such concessions made payments more affordable -- albeit over a longer period -- allowing clients to pay off their debt. For their efforts, the counselors received about 15 percent of the amount repaid.
In the late 1990s, many card issuers became less accommodating. Some credit counselors believe these companies reacted to a growing perception that some consumers who could afford to pay off their debts were taking advantage of the more favorable alternatives. "People entered debt repayment who didn't need to," says Cate Williams, vice president of financial literacy for Money Management International, a Houston-based network of counseling services. Meanwhile, as some of these financial service organizations diversified, they became more concerned by losses. "When any one unit experienced difficulty, it puts pressure on other units," says Williams.
-- Cate Williams,
vice president of financial literacy
for Money Management International
A 2003 study by the Consumer Federation of America found that at least five of the leading 13 issuers were offering smaller reductions than they did five years earlier. Counselors say that the trend toward less negotiation and less-generous offers has picked up pace in recent months as the economy dipped and card issuers have become increasingly jittery. "It's a slippery slope that's been accelerating in the last few months," says Orange County's Lohrenz.
Counselors say that Discover Financial Services won't budge from interest rates of 17.9 percent for many of its customers, while Capital One is locked at 15.9 percent. A representative for Discover said that "less than 5 percent of our card members in credit assistance programs are receiving a 17.99 APR," and that "nearly 40 percent of our card members in credit assistance programs have an APR below 10 percent." "We make a concerted effort to address temporary hardships and approach them on an individual basis," the representative said. "For severe hardships, we have a range of single APRs that we temporarily offer card members depending on their situation." Capital One didn't comment.
Even card issuers that will offer concessions may create other obstacles such as being slow to approve new loan terms. Three credit counselors say that American Express may take months to accept a debt repayment plan. American Express did not respond to a request for comment.
Chase is willing to cut interest rates but the bank is quick to disqualify debtors who have missed a payment, say some counselors. Last year, Natalie Lohrenz advocated for a woman who didn't have enough money to meet her monthly obligation after her company accidentally underpaid her. Lohrenz sent letters and offered to provide documentation from the employer but was rebuffed. The woman's interest rate soared from under 10 percent to almost three times that. She repaid her debt, although the new, higher interest rate delayed completion by a half year. "I fought up the chain of command," Lohrenz says. "For a long time, the client had to just increase her payment to Chase." Chase did not reply to a request for comment.
The banks are also pressuring credit counseling agencies by cutting the fees they pay. Credit counseling agencies are paid by the banks when consumers pay down their loans. But these days, they say they are receiving much less money for their efforts: about 6 to 8 percent of the total repaid, about half the amount of six or seven years ago. Some card issuers are paying lump quarterly sums to these agencies regardless of how many clients the agency represents.
In recent years, some credit counseling executives have tried to sway federal regulators into forcing card issuers to relax their policies. But a number of major card issuers have rejected any changes and regulators are reluctant to take action without their overwhelming support. Indeed, last year, federal banking officials reacted coolly to a series of recommendations presented by Novadebt's Greenberg and a group of credit counseling representatives.
Although he vows to fight on, Greenberg is doubtful that the counselors can overcome the lobbying heft of the banks. "They can pressure the regulatory bodies," he says.
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