Repayment plans can ease credit card debt

April 23, 2009


— It used to be that many folks didn’t worry when money got tight because the minimum payments on their credit cards were so low. If you only had to pay as little as 2 percent of what you owed, you might not make much of a dent in your principal but you could at least keep current.

That was then. This is now.

Now many credit card users, suffering from job losses or other effects of the recession, can’t even make the minimum payment on their card — or cards — pushing credit delinquencies to all-time highs, according to the Fitch Credit Card Index, which measures the percentage of credit card receivables that are reported more than 60 days past due.

‘Uncharted territory’

The delinquency index has increased 36 percent in the last six months.

“We are in uncharted territory for credit card losses,” said Michael Dean, a managing director for Fitch Ratings.

Credit card charge-offs, or uncollectible debt, surged to a 20-year high to 8.82 percent in February, according to the latest report by Moody’s Credit Card Index.

For years, legitimate nonprofit credit-counseling agencies have helped people negotiate repayment plans.

The problem is a growing number of consumers are so deep in debt and don’t earn enough that creditor concessions aren’t sufficient to help them qualify for the typical repayment plan. Last year, an estimated 405,000 counseled by member agencies with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies were turned down for repayment plans, according to Gail Cunningham, vice president of public relations for NFCC.

In an effort to help, the NFCC has struck a deal with the nation’s top 10 credit card issuers to roll out two special debt repayment plans.

“We want to help consumers pay back their debts and avoid bankruptcy,” said Susan C. Keating, president and chief executive of NFCC

Under the new negotiated debt repayment program, consumers may qualify for a “standard” or “hardship” plan with fixed monthly payments and a goal to be out of debt within 60 months. Those who qualify for the standard debt repayment plan would pay 2 percent of their outstanding debt each month. If the hardship plan applies, their payments would drop to 1.75 percent.

To make the plans work over the five-year repayment period, creditors have agreed to stop or lower fees and interest. However, principal balances are not reduced.

Here’s an example of how the program will work. Let’s take the typical consumer who sought help from an NFCC agency last year. The average client had $24,000 in unsecured debt. Assuming the average repayment was 2.25 percent of balance, this person would have paid $540 each month to service debt obligations.

If the same person applied and had been laid off, thus eligible for the 1.75 percent hardship category, his repayment would be $420 per month, for a savings of $120.

Additional features

There’s an added and much needed feature to the new debt repayment program that I love. In a typical debt repayment plan, people have to develop a budget. After paying for the bare essentials, all extra funds are budgeted to pay down participants’ debts. In the new program, people will be allowed to save for emergencies.

Some may balk at this, but if you don’t save and an emergency comes up, you’ll end up going further into debt. You have to save a little something even while you are struggling to get out of debt.

Creditors who have signed up for this “Call to Action” initiative include American Express, Bank of America, Capital One, Chase Card Services, Citi, Discover Financial Services, GE Money, HSBC Card Services, U.S. Bank and Wells Fargo Card Services.

Keating says she hopes other credit issuers will follow suit.“We appreciate NFCC’s effort to provide relief to debtors,” said Lisa Gonzalez, a spokesperson for American Express.

There is a caveat. Each credit card issuer determines which customers are eligible and how much of a break each will get. NFCC has put tracking in place to review the success of the plan, Cunningham said.

If you want more information or to find out whether you’re eligible for one of the debt repayment plans, contact a credit counseling agency in your area that is a member of either the National Foundation for Credit Counseling (800-388-2227 or in Spanish 800-682-9832) or the Association of Independent Consumer Credit Counseling Agencies (866-703-8787).


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