Credit Card Firms More Willing to Negotiate With Customers
Thursday, September 10, 2009
As more Americans lose work, many are increasingly struggling to pay their credit card bills, forcing banks to do what they had been loath to do in the past: forgive some of the debt or modify it in the cardholders' favor.
Much public attention has been paid to efforts at modifying mortgages to keep borrowers from losing their homes. But in another battered corner of the credit market, credit card issuers are quietly negotiating with borrowers rather than giving up entirely on millions of debts. Lenders are looking to restructure credit card accounts by lowering interest rates or minimum monthly payments for a specific period of time, waiving fees, or settling the debt by accepting less than what is owed.
"Issuers are looking to get something as opposed to nothing," said David Robertson, publisher of the Nilson Report, which monitors the industry.
Most card issuers are unwilling to talk about the practice for fear that they will be swamped with requests from people who do have the funds to pay their bills. But industry executives confirmed that the practice is becoming more common as card issuers face a record percentage of charge-offs, giving up on collecting debts that consumers never repay. The charge-off rate on U.S. cards for July was 10.52 percent of balances, according to Moody's, which expects it to reach at least 12 percent in the middle of next year.
"I think the credit card companies have learned from the mortgage problems the value to them and their customers of trying to work something out where it's appropriate and feasible," said Nessa Feddis, vice president and senior counsel at the American Bankers Association.
John Fullmer of Annapolis was one customer in need of help, after racking up thousands of dollars in card debt to start a mental health consulting business a couple of years ago. It seemed manageable until the interest rates on two of his credit cards soared past 20 percent. "I'm paying so much interest, I can't pay down the principal," Fullmer said.
Several weeks ago, he called Citi and Chase to plead for lower interest rates. Both companies agreed to a 6 percent rate -- but only if he closed the account. He did not accept right away as he contemplated how it would affect his credit score. Modifications on credit card accounts can damage a borrower's credit history several ways.
Shortly after, a Citi representative called to offer him a zero percent rate for 12 months -- again, if he agreed to give up the cards. This time, he accepted immediately. "They just said they wanted to work with me," he said.
Robertson said a Nilson Report review shows that about 3 million customers got some type of modification last year. He expects that number to increase this year as the unemployment rate nears 10 percent.
A Bank of America spokeswoman said the company expects to modify 1.2 million credit card accounts this year, up from 1 million last year. Chase has made it easier for those in the earlier stages of delinquency to get modifications and last year restructured credit lines for more than 600,000 customers, according to a company statement. The company said it expects that "elevated level of need" to continue this year. Lisa Gonzales, a spokeswoman for American Express, would not say how many people are enrolled in the company's repayment plans, which in some instances involve forgiving some debt, but said, "It's fair to say in light of the economy more people are experiencing financial difficulty, so we're offering the payment programs more frequently."
Samuel Wang, a spokesman for Citigroup, said the company provides a variety of programs for customers in financial distress, including modifying interest rates and matching payments to help retire the debt more quickly. "Citi is proactively reaching out to its customers who are not delinquent but who may be showing signs of financial stress," he said.
Consumer advocacy groups, however, have pointed out that credit card firms have increased interest rates and cut lines of credit in the past year in anticipation of a new law limiting their practices.