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Credit card delinquencies rise, card issuers offer more flexible repayment plans
04.28.09
By Gerri Detweiler
As credit card delinquencies reach record highs, the nation's top 10 credit card issuers have agreed to offer new reduced payment programs that will allow more consumers to pay back debt with the help of credit counseling agencies, reports the National Foundation for Credit Counseling (NFCC).
Relief cannot come soon enough for the many individuals and families buried in debt. According to the Moody's Credit Card Index, credit card charge-offs climbed in March 2009 to a record high 9.30%, and are expected to peak in the second quarter of 2010 at about 12%.
Over 3.2 million consumers contacted NFCC member agencies for credit help in 2008. While some simply received budgeting advice or pre-bankruptcy counseling, many were hoping to find relief through a Debt Management Program (DMP), a repayment program administered by the counseling agency under which creditors may reduce interest rates and/or waive penalty fees. With average credit card balances of $24,000 on six cards, however, many people who contacted a counseling agency found the required monthly payments were simply too high.
The NFCC issued a “Call to Action” in the fall of 2008, calling on more creditors to take additional steps to make DMPs more affordable. The NFCC also created a strategic partnership of NFCC Agencies and Association of Independent Consumer Credit Counseling Agencies (AICCCA) to work with top card issuers.
The result is a new more affordable “Standard” DMP and a “Hardship” DMP (together dubbed the “Call to Action” DMPs), aimed a helping those who want to avoid bankruptcy, but cannot afford a traditional repayment plan. Three key elements of the two new DMPs are:
- Lower monthly payments. Monthly payments can be as low as 1.75% or 2% of the outstanding balance. Previously, monthly payments totaling at least 3% of the balance were required. That means a borrower with outstanding debt of $24,000 could have paid about $750 under a traditional DMP. Under the new program, the same consumer could have a monthly payment as low as $420, a savings of $300 per month. All plans must be structured so the consumer is out of debt in five years.
- Monthly savings accounts. Consumers will be encouraged to save $25 per month for emergencies.
- Budgeting cushion. Consumers will be allowed a “cushion” of $200 in their monthly budget. Traditionally, many creditors have wanted the debtor to pay every available dollar toward their debts, but that left no money for unanticipated expenses and resulted in some consumers dropping out of the program.
Creditors supporting the “Call to Action” are 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. The NFCC is urging other lenders to sign on. The new Call to Action DMP’s went into effect March 31, 2009, which means consumers can benefit immediately.
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The new Call to Action DMP's went into effect March 31, 2009, which means consumers can benefit immediately.
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