US card issuers are facing a barrage of political and
economic pressures to ease the burden felt by financially stressed
cardholders. In a significant development, some of the leading
issuers have agreed to a package of rate cuts and relief measures
in an effort to be seen as consumer-friendly, as Charles Davis

In a telling reflection of both the times and of the political
climate, the 10 largest credit card issuers in the US have agreed
to give struggling cardholders deeper rate cuts and relief from a
variety of late and over-limit fees, the National Foundation for
Credit Counseling (NFCC) said.

The deal, hammered out between the foundation and the issuers, will
apply to consumer credit card customers seeking to qualify for debt
repayment plans through the Silver Spring, Maryland-based
non-profit’s counselling services. NFCC offers debt reduction
counseling through a network of 850 offices nationwide, and has
witnessed meteoric growth in consumers seeking assistance with
crushing debt loads often fuelled in large part by credit card

NFCC officials praised the concessions, citing rising numbers of
clients who can not afford even the most basic repayment plans
without some easing of fees and rates.

Susan Keating, the NFCC’s president and chief executive, said the
concessions were a response to the organisation’s call in late 2008
for issuers to enhance the concessions they traditionally offer to
troubled borrowers.

“Many consumers are facing serious financial problems, and they
should be given every opportunity to qualify for an affordable
programme that meets their individual circumstances and that puts
them back on the road to financial stability,” said Keating. “We
applaud these creditors for recognising the need to do more for
consumers who are trying to avoid bankruptcy, and need some
additional help with interest rate and fee waiver concessions so
they can repay their debt.”

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Debt reduction measures

The group of issuers, including Capital One, Bank of America, Chase
Card Services, Discover and American Express, agreed to a
significant series of concessions aimed at increasing the number of
struggling cardholders eligible for debt reduction packages.

In debt management plans, card issuers typically agree to waive
certain fees after consumers enrol in such a programme. The
cardholder still pays interest, ranging from a low 5 percent to as
much as 19 percent, depending on the creditor. In rare cases,
interest is waived altogether.

In return, the cardholder must promise not to rack up more card
debt, and 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.

The average counselling client had $24,000 of credit card and other
unsecured debt last year and $39,000 in household income, according
to the NFCC. 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 – 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, a saving
of $120 a month.

Rising numbers of stressed consumers

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 as a result. Kaulkin
Ginsberg, a consulting firm, estimated that the amount of consumer
credit at risk of default increased in February by $5 billion to
$24.5 billion.

The issuers also are hoping that by working with reputable
non-profit debt reduction agencies, they can help cardholders avoid
the for-profit schemes that have popped up in the recessionary
climate. With the economy on the ropes, hundreds of thousands of
consumers are turning to ‘debt settlement’ companies, only to find
themselves deeper in debt than ever before.

As many as 2,000 settlement companies operate in the US, triple the
number of a few years ago. Settlement ads offering financial
salvation blanket radio and late night television. These companies
collect a large fee, often 15 percent of the total debt, and often
accomplish little or nothing on the consumer’s behalf.

State attorneys are being flooded with complaints about settlement
companies and other forms of debt relief. In North Carolina,
complaints doubled last year, while in Florida they tripled, a
spokeswoman for the state attorney general said. In Oregon,
complaints have quadrupled since 2006.

Debt settlement is not regulated by federal law as debt collection
is, though general fraud and deceptive marketing laws may apply.
The Federal Trade Commission has successfully pursued seven cases
against debt settlement companies since 2001, but self-regulation
generally is the rule.

Issuers hope for positive publicity

Aligning with NFCC assures issuers that they will not generate bad
publicity from the for-profit debt counselling services, a key
consideration given the political volatility of card fees and
interest rates.

Representatives from the American Bankers Association joined
executives from the nation’s largest banks and credit card
companies in a 23 April meeting at the White House with President
Barack Obama and his top aides, including Treasury Secretary
Timothy Geithner and senior adviser Valerie Jarrett.

The high-profile meeting came as the House Financial Services
Committee considers the Credit Cardholders’ Bill of Rights that
would codify new Federal Reserve regulations issued in December
aimed at curbing deceptive credit card practices.

A separate bill in the Senate, the Credit Card Accountability,
Responsibility and Disclosure Act, sponsored by powerbroker Senator
Chris Dodd, a Democrat from Connecticut, would go further. Among
other things, it would ban a company from using a consumer’s bad
credit history as a reason to raise interest rates on a credit

The action from Congress comes as the industry begins a complete
overhaul of its business model in order to comply with the new
consumer-protection rules issued by the Fed after years of policy
work, field testing and public comments. The rules cover most of
the provisions that lawmakers are considering but do not take
effect until July 2010, prompting Congress to want to act now and
the credit card industry to cry foul.

Sidling up to those truly struggling with enormous debt is a fine
way to gain some political goodwill at a time when issuers find it
in short supply.