Top Three Reasons Your Credit Card Company Wants You to Join a Debt Consolidation Program

[May 26, 2009.]

 

Long-time credit card industry analysts have watched the business of lending turn itself upside down since the inauguration of President Obama. Consumer frustration over high credit card rates and fees have combined with lawmakers’ willingness to tap into populist financial ideas. As a result, unprecedented credit card regulations have been slated to take effect in early 2010 that change the ways that credit card companies earn profits. Therefore, banks and private lenders once eager to trickle interest charges from customers over long periods of time have suddenly become eager for cardholders to pay down their debt. According to personal finance experts, banks have three reasons to get hands-on with debt relief:

Debt Relief Prevents Bankruptcy
Even after the credit card industry lobbied for significant changes to the Bankruptcy Code, new rules about mandatory credit counseling and Chapter 13 repayment programs failed to reduce lenders’ charge-off percentages. In fact, the effects of a global recession have sent late payment percentages skyrocketing. Credit card companies realize that secured loans, such as auto and home loans, take precedence over unsecured debt in a Chapter 13 bankruptcy. By using loan modifications and fee waivers to entice consumers into debt consolidation programs, credit card companies hope to reduce the number of bankruptcies among cardholders.

Consolidation Loans Prevent Additional Spending
Over the past two decades, credit card companies heard criticism about the practice of encouraging balance transfers and home equity credit consolidation loans that allowed consumers to run up new balances on old accounts. During a booming real estate market, it was easy for lenders to promote a practice that relied on creating a seemingly endless supply of value. However, as home prices shrink in many parts of the country, many debt consolidation loans now carry the stipulation that borrowers cut up their credit cards. Encouraging borrowers to join debt relief programs may limit potential profits, but it reduces the risk of charge-offs and write-downs.

Debt Consolidation Locks Rates and Fees
New credit card laws take effect in February 2010, severely limiting credit card companies’ ability to hike interest rates and assess program fees. Consumers participating in debt relief programs and consolidation loans can either transfer balances from cards completely or qualify for fixed payments that preserve some account maintenance charges. Getting risky customers off their books helps credit card companies improve their debt portfolios. However, locking in today’s rates and fees preserves the profit potential of an existing customer, compared to customers who sign up for cards after new laws take effect.

While some credit card companies issue their own debt consolidation loans, most work in conjunction with third-party debt relief programs to offer loan modifications. Experts note that some of the best debt relief deals are reserved for customers with 90 days or more of outstanding payments. Regardless of your current debt situation, now is a great time to start negotiating debt relief deals, especially in conjunction with debt consolidation loans.

 

About Author:

Joe Taylor Jr. is an internal business consultant for a Fortune 500 company, who writes about finance, culture, and design. He holds a Bachelor of Science in Communications from Ithaca College.