Forbearance: Savior of the Debt-Ridden

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Anyone who has been late on a student loan might be familiar with the term "forbearance" — it’s how borrowers can borrow time to pay back their loans if they get into tough financial straits. But now credit card companies are getting into the forbearance act. Here’s the deal — and how consumers can get in on it too.

Our story starts with Capital One Financial Corp. (Stock Quote: COF), which announced this morning that U.S. credit card defaults rose in January. One of the largest providers of branded credit cards in the U.S., Capital One reports in a regulatory filing that the percentage of credit card debt that it will never collect rose to 10.41% last month, up from 10.14% in December.

The Capital One numbers are symptomatic of a larger trend. All told, Americans may be trying to bust the credit card debt habit, but it’s not easy. According to the Nilson Report, the average outstanding credit card debt for households that have a credit card was $10,679 at the end of 2008. In 2007, that average was $10,637.

With card companies hiking interest rates after even one late payment, it’s hard to make up ground. Add to that the increasingly likely reality of a job loss, or an illness that keeps you away from the workplace, and it’s not hard to see why so many Americans believe they could use a breather from trying to recover from onerous credit card debt.

So why not ask your credit card company for a break from paying your debt? In credit market terms, that’s called forbearance and it essentially allows you some breathing room from your credit card debts for several months while you regain your financial footing and can re-address your credit card debt.

Make no mistake, forbearance does not absolve you of your card obligations. You’ll still have to pay off your debt, to the penny. And in most cases, you’ll still accrue interest on the debt,

But you can buy six months, or even one year in some cases, of time through forbearance. You also might gain a break on your credit card interest rates or have your monthly minimum payment reduced.

As long as you’re up front with your card issuers, chances are they’ll help you out. The Web site CreditCard.com reports that Citi (Stock Quote: C) green-lit approximately 350,000 credit card accounts for forbearance. According to a Feb. 3 update on its Troubled Asset Relief (TARP) obligations, Citi reported that it was “offering new forbearance programs with broadened eligibility criteria, affecting accounts in earlier stages of delinquency. These include payment incentives, match payments and balance-consolidation programs that accelerate the reduction, or amortization, of card loans without materially increasing the cost to consumers."

The key in getting help with your credit card debt is to stay ahead of the problem. Call your card issuers, inform them of your financial situation, and ask specifically for a forbearance deal. Also, don’t use your card while you’re in forbearance (although it’s likely that the card issuer will freeze your card for the duration of the forbearance anyway). But if the card issuer doesn’t freeze your account, and you do use your card, you’re putting your agreement in jeopardy.

In the end, card issuers aren’t crazy about granting forbearance on credit card debt, but they also have a vested interest in keeping customers out of bankruptcy. If that happens, they likely won’t see a dime of what they're owed.

That’s where a card issuer can build a bridge to financially-strapped customers via forbearance.

Just remember — you have to ask.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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