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.
'They wanted to work with me'
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.
Interest rates hiked
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.
"The card companies are giving with one hand but taking away from the other," said Ed Mierzwinski, consumer program director for U.S. PIRG, a consumer advocacy group. "The problem is the credit card companies are treating consumers randomly. A small number are getting helped. A larger number are being hurt."
The delinquency rate on U.S. credit cards, which measures the proportion of accounts that are more than 30 days past due, was 5.73 percent in July, up from 4.5 percent a year earlier, according to Moody's.
The banks are even authorizing customer service representatives to negotiate settlements and modifications rather than forcing borrowers to make their cases to supervisors, experts said. And many times, it isn't the customer making the first move but the card issuer.
"The issuers are not trying to kid themselves. If someone's lost their job, that's it. Or if someone has just been reduced from a full-time to a part-time job, that's it," Robertson said. "The issuer isn't going to duck and weave and not see that there is a problem."
Bill Epke, a New York fundraising consultant, didn't even know to ask for a modification. He had run up $20,000 in debt on two cards after being unemployed for two years. Though he had found a new job at a nonprofit fundraising firm, he was still making little progress paying off his debt because the interest rates were between 16 to 18 percent.
A few months ago, he received a letter from Bank of America with an 800 number he could call if he was "in trouble." Epke made the call, and the bank representative offered to cut the rate on one card to 5 percent and on the other to 4.25 percent, with the balance to be paid off in 60 months. The account would be shut down, but, Epke said, he didn't care much.
"I had to give up the cards, but it's nice to know that the payment now is going mainly to principal rather than being lost in high interest charges," Epke said.
Not every customer can expect to get such treatment, industry representatives and card experts said. Card issuers would not specify how many modifications they turn down. Nor do the issuers publicize eligibility requirements. All they would say is that they decide on a case-by-case basis.
Some will approach only customers who are delinquent. Some will reach out at the first signs of trouble. Experts said other factors that might be taken into consideration are income, debt loads and payment history.
And borrowers can pay a price if they're granted a modification. Forgiven debt could be taxable and can tarnish the borrower's credit report for up to seven years. If the bank reports to credit bureaus that it forced the borrower to close the account, that, too, could damage the credit history, jeopardizing chances for future loans. Finally, if a borrower has a lot of debt, a closed account could hurt a credit score. If the borrower has to give up his card, then a key figure used by lenders to determine creditworthiness — the ratio of outstanding debt to available credit — can soar, harming the credit score even further.
"It's really something the individual will have to weigh," said John Ulzheimer, president of consumer education for Credit.com, which tracks the industry. "Is the damage worth it because the funds are less expensive?"
Also uncertain is how the new credit card law adopted by Congress in May will affect banks' ability to modify loans. The law, parts of which took effect last month, restricts card issuers' latitude to change rates and decide in what order to apply payments when different balances have different rates.
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