Even as they promote debt counseling,
lenders cut support and raise rates
By Holden Lewis • Bankrate.com

Credit-card issuers are like a guy with three hands.

One hand is pushing troubled customers to seek debt counseling before they can file for bankruptcy protection. Another hand is cutting back on contributions to debt-counseling agencies, which largely are supported by credit-card companies.

The other hand is snatching back much of the break in interest rates that credit-card issuers give people enrolled in debt-management plans. Critics say that without interest-rate relief, more people could be forced into bankruptcy -- an outcome that card issuers don't want.

"It truly is a shortsighted measure," says Travis Plunkett, legislative director for the Consumer Federation of America.

Looking for a 'fair' deal
But that's not how credit-card companies see it. It's only fair that people in debt-management programs pay their fair share, they say, and they don't believe they're forcing anyone into bankruptcy.

The result has been a double whammy to the credit-card industry. Issuers lose money whenever someone seeks bankruptcy protection. And when people enroll in debt-management programs, card issuers typically charge lower interest rates, stop charging late fees and contribute money to the debt-counseling agency.

Faced with these pressures, lenders have asked Congress to change the bankruptcy laws. Among the proposals: a requirement that individuals seek debt counseling before they can declare bankruptcy. If enacted (President Clinton has promised a veto), the law would send thousands more people to debt-counseling agencies.

Most debt-counseling agencies are nonprofits that get almost all their financial support from the credit card industry. They offer an array of services, including debt-management plans. When you qualify for a debt-management plan, the counseling agency consolidates all of your debts. You make a big monthly payment to the agency, which distributes the money to your creditors. A debt-management plan usually lasts three to four years.

The arrangement is supposed to benefit all three participants. The consumer usually gets reduced interest rates, lower monthly payments, no more late fees, and fewer calls and letters from bill collectors. Debt-counseling agencies get their operating money by taking a percentage of the payment. Lenders get to collect money that they wouldn't receive had the debtor declared bankruptcy.

Although they don't admit it publicly, credit-card companies believe they get the short end of the stick.

"I think the issuers are probably looking at debt-management plans the way they look at bankruptcy: that consumers are taking advantage of debt-management plans; it's too easy," says Frank Martien, senior consultant for First Annapolis Consulting, a firm that advises the banking industry.

That's not news to Celia Diehl, vice president of creditor relations at the National Foundation for Consumer Credit, the umbrella organization for 1,440 local debt-counseling agencies (most of which are called the Consumer Credit Counseling Service). "What I hear is that creditors are beginning to shop counseling agencies," she says.

Different help for different folks
One-third of debtors who contact a credit counseling agency end up in debt-management plans. The rest may just walk away with budgeting help or even a referral to gambling or substance-abuse counseling, or to a bankruptcy attorney. Those who are accepted for a workout plan need to qualify. The Consumer Credit Counseling Service offices require documentation and won't enroll someone in a debt-management plan just because he has trouble paying bills. Debt Counselors of America works over the phone and Internet but it, too, requires clients to send in extensive paperwork before enrolling in its debt-management plan, called One Pay.

Although lenders worry that some consumers abuse debt-management programs so they can get lower interest rates and halt collection calls, they recognize that the agencies provide a valuable service.

"They're sending customers to credit-counseling agencies earlier," says Patricia Boerger, spokeswoman for the American Bankers Association, explaining that card issuers use computer technology to spot account-holders with problems.

Nonetheless, the credit card issuers are trying to recover some of the costs of letting strapped customers join debt-management programs. Early this summer, some of the biggest credit-card issuers raised interest rates on debt-management plans. First USA raised its rate from 0 percent to 6 percent; Household Credit Services hiked its rate from 6 percent to 9 percent, and MBNA increased its rate from 10 percent to 15.9 percent, although it will negotiate a lower rate in some cases.

Mike Kidwell, co-founder and vice president of Debt Counselors of America, says the raised interest rates might boomerang on banks by encouraging more consumers to declare bankruptcy.

Making debtors pay for programs
People from credit-card issuers dodge the question about whether charging higher interest rates will increase bankruptcies. Instead, they talk about how much debt-management programs cost.

"We fully support the credit-counseling agencies. We think they do a good job," says First USA spokesman Jeff Unkle. He adds: "When cardmembers take advantage of this program, we're eliminating late fees, we're cutting out the collection calls. The program is not without cost to us. We think it's appropriate that people taking advantage of the program pay some of the cost of the program."

Craig Streem, a spokesman for Household Credit Services, notes that customers who are not in debt-management plans pay interest rates in the high teens.

"If someone enters into a workout, sure, the rate is now a little higher than it was before, but it's dramatically lower than what they would have been paying" before they entered a debt-management program, Streem says.

Less support for agencies
While the card issuers make troubled customers pay more, they're giving less to debt-counseling agencies. In years past, the customary contribution was 15 percent of a consumer's debt, although some gave less. Starting this summer, most of the biggest credit-card issuers started giving 10 percent. A few contribute 6 percent. First USA wants to encourage agencies to make payments electronically instead of by check, Unkle says, so the company pays 6 percent to agencies that send checks and gives 10 percent to agencies that use electronic money transfers.

But that strategy might backfire on credit card issuers, says Martien of Annapolis Consulting. He fears that the reduced contributions might harm debt-counseling agencies that now do a good job of weeding out people who don't truly need debt-management plans.

So, is it just a case of one hand not knowing what the other two are doing, or are the credit card companies up to something more sinister?

With tongue in cheek, Plunkett of the Consumer Federation of America observes, "It could be that they have a giant master plan to close off bankruptcy as an option and squeeze the debtors harder, because it makes them harder for them to declare bankruptcy." But, he adds, "I think that gives them too much credit."

-- Posted: Sept. 13, 1999