Credit-card Issuers Cutting Consumers More Slack

April 21, 2009|By EILEEN AMBROSE

For years, consumers deep in debt turned to counseling agencies to negotiate repayment plans with credit-card issuers. But consumers are now in such dire straits, some can't even afford repayment plans despite concessions from card companies.

So the National Foundation for Credit Counseling, a trade group for credit counselors, approached card issuers about making even more concessions for consumers without the resources to repay under a regular plan. The group announced last week that the top 10 card issuers, including Capital One, Bank of America, Chase Card Services, Discover and American Express, signed on.

Of course, it is in the interest of credit-card companies to be more lenient, even though they will collect less in fees and interest. What's the alternative? If consumers can't repay, they might file for bankruptcy and have all their card debt wiped out.

More than 405,000 consumers last year were turned down for a repayment plan because they could not afford it, the NFCC said. And likely some of them filed for bankruptcy.

Nevertheless, if you can't qualify for a regular repayment plan - and many Marylanders can't - this new willingness by card issuers to cut more slack could be enough to help you avoid bankruptcy and its consequences on your credit record.

"In the last 12 months, more and more people that we consulted with are just too short of funds to even consider enrolling in a debt management program," says Jim Godfrey, president of the Consumer Credit Counseling Service of Maryland and Delaware.

Several years ago, one-third of clients would qualify for a repayment plan, now about one-quarter do, Godfrey says. "People are in more serious financial trouble than they used to be," he says.

Often in debt management plans, card issuers waive certain fees after you enroll in a program. You still pay interest, ranging from a low 5 percent to as much as 19 percent, depending on the creditor, Godfrey says. In rare cases, interest is waived altogether.

In return, you promise not to rack up more card debt. And you agree to repay a certain amount of debt each month, an average of 2.25 percent, with the goal of paying it off in five years, according to the NFCC.

(A counseling agency acts as the middleman between you and the card issuers, receiving a portion of the repaid debt for its services.)

The average counseling client had $24,000 of credit-card and other unsecured debt last year and $39,000 in household income, says Sally Parker, NFCC senior vice president. On the standard debt plan, that client would have to pay $540 a month for five years.

But with additional concessions on fees and interest - but none on principal - your payments could be reduced to either 2 percent or 1.75 percent of debt each month. At 1.75 percent, the monthly payment to eliminate $24,000 in debt would be $420 over five years, Parker says.

"It's the difference between remaining current with their mortgage, or paying their rent or funding other unexpected expenses," Parker says.

"It's a good first step," although hard-pressed consumers really need forgiveness of principal, says Travis Plunkett, with the Consumer Federation of America.

Lower repayment terms are being rolled out at counseling agencies, say the NFCC and another trade group, the Association of Independent Consumer Credit Counseling Agencies. Be aware, each credit-card issuer decides how much leeway to grant a specific customer, so some consumers might get more leniency than others.

Agencies that offer debt management must be licensed in Maryland to serve residents. For a list of licensed counselors:

Reputable counseling agencies will help you with budgeting, let you know whether a debt management plan is right for you or if you are better off seeking another alternative, including bankruptcy.

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