Wednesday, September 9, 2009

Banks make deals with debtors; something is better than nothing

The Washington Post reports today that many banks have taken to actually lowering the interest rate on credit card debt when someone becomes unable to pay and are also actually forgiving debt in some cases. Keeping in mind that the refusal to pay any further by the debtor in the previous post is probably not an isolated incident, it certainly does make sense to try working with people, thereby getting something instead of nothing.

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.

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.

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."

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.

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.

So it seems as if the banks´ strategy is to screw over people by first raising rates up to 30%, cutting credit lines, charging ourageous overdraft and other fees, and then, if people stop making payments, to do any and everything to salvage just a bit of scraps.

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