Credit Card Companies and Repayment Plans
After skimming this article from CNN Money, I was going to complain that people are now whining to get bailed out of their credit card debt. I was going to ask why don’t the credit card companies just offer a repayment plan, until I read it more closely and saw this paragraph:
Current government rules don’t allow lenders to offer repayment plans that reduce the amount of principal owed and borrowers to repay the balance over a period of several years. In cases where the principal can be reduced, under credit card settlements, borrowers normally are required to pay off the remainder over months rather than years.
What? Credit card companies aren’t allowed by law to offer repayment plans??? I’m sure there’s a good reason for this, but I’m too lazy to figure out why so I’ll ask you all to answer it for me.
But in the meantime, I have two more questions:
- Why don’t the credit card companies change their minimum payment policy so people don’t pay hundreds of dollars each month, just a few dozen? I saw some companies recently jacked up the percentage used to calculate the minimum payment, so why not go the other way?
- From personal experience with friends and family, I know one of the bigger issues with credit card debt repayment is the exorbitant interest rates they charge. Why are the CC companies charging the highest rates to the people who can afford it the least? I mean when you have a 30% interest rate on your debt because you missed a payment, then it becomes exponentially more difficult, or even impossible, to get ahead with your payments! Offer to reduce the rate from 30% to 10%!!! The CC company is still getting a good return on their money and more assurance that they’ll actually get their money. Why push the limits and end up getting nothing due to the borrower filing bankruptcy? Greedy b(^(&^$*ds!
Luckily I’ve never missed a payment and (as far as I know) have a spotless credit history. I really lucked out because I had over $12,000 in credit card debt in college and no job lined up after graduation until my last semester. I made some dumb moves but escaped by the skin of my teeth! But friends and relatives haven’t fared as well and are struggling to keep up with their payments. They’re honest people who want to pay back their debts, but the CC companies (and others) make it extremely difficult. Ease up on my friends, you corporate fools, and you’ll get more money!
You pose a very interesting question that I would love to know the answer to myself. Part of the payment calculation, though, is also based on the interest rate. The payment needs to be high enough to cover the interest. One of my wife’s cards, I believe it is Discover, charges a payment % just barely over the interest rate. So basically the principle barely goes down with each payment. ( $7 as a matter of fact. $200 per month payment and $193 goes to interest.) (I know, transfer to lower interest card. )
I never have understood the whole risk thing when it comes to interest rate. Risk should not be a factor in the interest rate. I think it is just a ploy to justify getting more money from you. Why not just charge a fee if the customer becomes risky. After 6 months of paying on time the correct amount, cut the fee in half. After another 3 months completely eliminate it. The key thing for me about this is that they are quick to raise it if you make a mistake but then won’t bring it back down unless you call them, and that isn’t always successful.
What gets me even more is insurance companies determining your rate based on your credit score. My score is not bad but not great either. Because of this I pay higher for my auto insurance, as much as $100 more per month. Why?
Finally, great site. This is the first time I have posted a comment here but I have been following for quite a while. Keep up the good work.
I see what you are saying about flat rates. That makes sense when I look at it that way. I guess the point is that they seem quick to raise rates but not lower them. I have thankfully managed to not get in over my head yet. I make my payments on time and usually more than the minimum. If I do that for a while you would think that my rate would come down. With competition out there, why keep charging me higher rates, especially in this economy? I haven’t talked to my card companies in a while. This post has inspired me to go ahead and call them.
Thanks.
I seemed to remember a change in the laws a few years back which forced banks to raise the minimum payments on credit cards. The reason was because minimum payments were so low that people could basically pay forever without making any progress. It does seem unreasonable that a credit card company can’t make that decision for themselves. Around the same time there were bankruptcy law changes as well, which made it harder to get out of credit card debt in the event of a bankruptcy.
Here’s a link to a discussion on the topic:
http://www.bankrate.com/brm/news/debt/20050511a1.asp
Regarding interest rates… that’s just a matter of risk. A credit card company is going to charge you a rate based on how risky they think you are. I would agree that missing payments is a pretty good sign of higher risk, though I’m sure they aren’t slow to double your interest rate in the event they have the opportunity. If they lowered rates for people who weren’t making their payments, then it seems more like rewarding bad behaviour.
I actually just called my credit card company a couple weeks ago and asked for a lower rate. To my surprise, they dropped it from 10.9% to 6.9%. I have good credit though and have always made my payments, so I’m sure that has something to do with it. I’ve certainly been rejected for interest rate drops in the past when I wasn’t making very wise financial decisions.
I enjoy the site… thanks for creating some informative and relevant topics.
The reason interest rates are different as a result of risk is because some people will default, and will not pay their bills. This means that the credit card company loses money because they loaned it to someone but aren’t getting it back, or maybe in a settlement, they only get a portion of it back. To be profitable, they need to make sure they cover those costs. They can either raise everyones rate and have everyone absorb the risk, or they can assign higher rates to the accounts which they see as more risky. That is common practice in all lending, whether it be for a car, or a house, or a credit card.
Flat fees wouldn’t seem fair to most because why should I pay a fee of $x for my credit card which has $1,000 on it, when someone else pays the same $x fee with a balance of $10,000. Interest rates are the “fairest” way to spread the risk in my opinion.
Now, while I agree that the model makes sense, don’t get me wrong, I certainly think that they take advantage of the “opportunities” they have to make more money by raising rates. It does seem extreme to double someones rate because they were late on a payment but I also have to admit that they do define that penalty up front so I really can’t blame them if they take advantage of it when I don’t make my payments on time.
Funny that you should write about this topic today. I spent several hours this morning calling credit card companies in an effort to negotiate payment arrangements. I lost my job six weeks ago and have not yet found a new one. Unfortunately, my unemployment check is 1/3 of my former salary, so rent, food and health insurance for me and my children are now my priorities!
Up to this point, I had always made my payments on time and have an excellent credit score. On one card, I have a 0% interest rate and, on the other two, the rate was 9.9% and 11.49%. I had three different responses from three different companies:
* Citibank was most cooperative and offered me two months with no payments due then four months of a discounted payment;
* Bank of America suggested debt management but let me know that I could make reduced payments and only be penalized with a fee once, so I chose that option;
* Discover told me that my account had to become past due before they would set up a repayment schedule for me.
It seems to me that if Citibank can set up a repayment schedule, then the other companies can do that as well.
I think you have to read the excerpt a bit more closely. They are talking about reduction of principle, not that banks aren’t allowed to renegotiate payment terms. banks can. If the banks reduce principle, then the amount is a charge off and the person has to claim it as income and owe taxes on the charged off amount. banks can rebirth an account for interest and payments (i.e. reset payment terms).
The minimum payment on our Capitol One account did actually reduce from 2% of the balance to 1% of the balance. So someone is making changes.
I double checked the website twice, and called them once to make sure it was not a mistake! We are currently making minimum payments on this card as part of a debt snowball.